72t Distribution at Year-End
Happy New Year! I had a client who contacted me late in the year to establish a new 72t plan. We had sent her out funds before for a 60 day rollover, so had her bank info on file. We rushed to get it out in time, and as it turns out she closed her bank account in the meantime. The funds are now back into her account, and the custodian advised they can re-issue a check coded as 2024 for tax purposes as long as I sign a hold-harmless letter of indemnification. Anyone have any experience or advice in a situation like this? I know the rules are pretty rigid, last thing I want to have happen is to have this error result in an issue down the line and trigger penalties. Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-02 13:14
Are you referring to an IRA as the “bank account”?
As for an IRA custodian willing to back date a distribution for 1099R reporting purposes, I doubt that the IRS provides that authority, but the IRS will be guided by the 1099R and expect that it matches the 72t plan calculation.
If this late distribution was to be the first 72t distribution, but was not made in time, the plan would not start, and there would be no 2024 distribution.
If the plan did not start, then there is no tax or penalty in 2024, and the plan could start in 2025. The total distributions in 2025 would be little different than they would have been, but if the first distribution is to be in 2025, that would eliminate use of the October mid term rate to calculate the distribution.
Another minor issue is that 60 day rollovers are best avoided unless needed as a safety margin in the event that too much is distributed and a 72t plan would be busted. If too much is distributed, the excess could be rolled back to protect the plan, but taxpayer needs to qualify for a 60 day rollover as only one is allowed over a 12 month period.
Permalink Submitted by Joshua Paradis on Thu, 2025-01-02 13:48
Thank you for your advice. The distribution was processed in 2024, however was received back into the IRA since the bank account had closed. Our custodian is essentially re-issuing it as if it were a check that was lost or some similar situation and coding as a 2024 distribution. This was going to be the first distribution in the plan. Perhaps we should just cancel it and start again in 2025 to be safe
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-02 14:10
If the custodian reports the distribution on a 2024 1099R, there is little chance that the IRS would know unless they audited the IRA custodian. But the custodian apparently wants a HH just in case they do.
As for the client, particularly if this distribution is for a full annual amount, and the client would benefit from having this income in 2024 instead of in 2029 (if this is a 5 year plan), then you could pursue the backdated distribution with HH and the plan would start in Dec 2024.
If it’s a 5 year plan it would end in 12/29, or otherwise at age 59.5 if later.
If instead, you plan to start the plan this month and avoid the HH and 2024 1099R, the higher Dec rate of 5.03 could be used, slightly higher than the 5% that was probably used for the current calculation.