72(t)
It’s been a while since I’ve received questions re: 72(t) SEPP questions. I should be probably know the answer to seemingly straightforward question.
Can/should the the initial SEPP payment be prorated? Or regardless (when during the year) it’s taken is the IRA owner required to distribute what amounts to the full year payment?
Can you point me IRS guidance and or Code Section?
Thank you
Permalink Submitted by Alan - IRA critic on Mon, 2022-04-11 18:55
For a 5 year plan, it is safer to just take 5 full distributions in CY 1-5, then nothing in year CY 6 until 5 years and 1 day has passed from the date of the first distribution. Pro rating the first year distribution by the month is probably OK, but it would trigger similar pro rating in CY year 6 in order to produce 60 months of distributions.
For a plan ending at 59.5 (longer than 5 years), there are more options. For example, for the first year take out the full annual or pro rated annual by the month, and in final year take out nothing, pro rate by the month or a full annual. These options are not enumerated in an IRS Regs or the tax code, but just evolved over 20 years after RR 2002-62 according to private letter rulings and IRS administrative practices. So there is very little IRS guidance on the fine points of 72t options. The IRS is more lenient than they used to be and are not busting plans due to small differences such as rounding to whole dollars instead of nearest cent.