72q
I have a client who has 2-500k fixed annuities that are non-q in which we activated a 72q on, we are now below his basis so there is no taxable amount being withdrawn, the annuity company allow him to take out up to 10% per year. Could he take out more than the 72q amount because we are into basis now or will that cause a IRS penalty?
Thanks
Permalink Submitted by Alan - IRA critic on Tue, 2023-06-06 15:36
The rules for a 72q and a 72t are almost identical, but the determination of the taxable amount follows the respective rules for qualified plans, IRAs, Roth IRAs, and NQ annuities. The taxable amount of a year’s distributions has no affect on compliance of the plan, just on the taxes for the distribution. “Up to” 10% appears to reflect a restriction on distributions from the annuity irrespective of 72q rules, and a 72q calculation would not generate a distribution of nearly that %. If the annual 72q calculation is exceeded, it would bust the plan, resulting in all prior taxable distributions being subject to retroactive penalty and interest. Again, the taxable/non taxable amounts have no bearing on the plan itself, which must be completed without regard to whether future distributions are taxable or not.
Permalink Submitted by Zachariah Hammel on Tue, 2023-06-06 16:05
Thank you for that answer, I just have one more aspect to clarifiy. Lets say that the annuities never made any interest and his 72q payments were all basis. Does that change things?
Permalink Submitted by Alan - IRA critic on Tue, 2023-06-06 18:04
No change to the amount that must be distributed, but those distributions would be entirely non taxable. As such, if the plan is busted there would be no retroactive penalty since the penalty only applies to taxable distributions.