72t sepp Ira plan busted. How to fix?

Submitted by James Long on Mon, 2024-02-26 12:03

I created a 72t Ira 20 months before reaching age 59 1/2 I use the amortization schedule plan and now I have five years to make withdrawals. I have 2.5 years remaining. 2023 I took 12 withdrawals equaling the amount I’m allowed to withdraw. my broker initiated withdrawal for the new year 2024 which I received on January 1, the funds were withdrawn on December 31. this busted the plan. now I have 13 withdrawals showing on my 1099-r from Schwab. taking me over my limit for 2023 even though I can prove I actually received the correct amount. and that’s what the 1099-r from the broker states. how do I fix this January deposit withdrawal is not showing up for this year‘s 2024 withdrawal, it went back to 2023. Schwab suggests since I have until March 2 to either transfer cash (the amount of the discrepancy ) from non qualified fund (they are calling it a rollover) or send cash from checking to the sepp Ira. Using the 60 day rollover rule and the 1 time 12 month rollover rule. All this will generate a 5498. I hope this makes sense. That I have described this ok. I’m not comfortable doing as Schwab has suggested. I will get taxed again on my rollover when I withdraw. There must be an easier solution.



Submitted by Alan - IRA critic on Mon, 2024-02-26 15:42

Listen to Schwab as long as you have a rollover available. Rolling back an extra distribution will allow you to report a rollover on your 2023 1040 that erases the extra distribution. You will have received what you should have received and your 2024 distributions can continue until you have satisfied the required 60 months of 72t distributions under a 5 year plan.  Don’t worry about the 5498, as the IRS is used to seeing rollover contributions reported in the year after the distribution. Your situation illustrates why a 72t plan IRA owner should save their rollover for a situation like this as a bailout for taking out too much in a year. Finally, while you cannot roll over a 72t distribution, you had completed your 12 monthly distributions in 2023, therefore this extra distribution is not treated as a 72t distribution. The broker is fortunate not to have to reimburse you for their error.

Submitted by James Long on Tue, 2024-02-27 20:54

Thanks for responding. The broker said it was my error for picking the 1st of the month on the auto withdrawals. SuggestEd I change to the 5th. I was assuming they wouldn’t ledger the withdrawal till the 1st. In lieu of that being the date of transfer to checking account? Ugh. If I choose not to fix this with the rollover the 10% penalty only applies to withdraws prior to me turning age 59.5 correct? how does one figure the interest? Would I report a busted plan this year? As my 1099-r shows I went one withdrawal over in 2023. How does the irs even know what my total withdrawal should be for the year anyway? I guess the amortization schedule.And moving forward this Ira is considered a non 72t plan Ira? 

Submitted by Alan - IRA critic on Tue, 2024-02-27 21:47

Yes, automatic withdrawals should never be schedule for the first or last week of the month for this reason. Seems like the broker should have warned you about that from the start. In any event, you are correct that if you bust the plan, the retroactive penalty and interest only applies to the distributions made prior to 59.5. The IRS will have to figure the interest, but it will be less the sooner they bill it.
The plan was busted in 2023, the year that the 1099R totalled 13 payments. You would report that on your 2023 return, on Form 5329. There is no need to file any amended returns.
Since the plan is busted, you are no longer required to make distributions of any particular amount, but you will owe the penalty on any distributions taken prior to 59.5. 
Of course, you can still restore the plan and prevent any penalty by completing the 60 day rollover if you have one available.
The IRS will know from your prior return that you were claiming the 72t exception and could see that your 2023 1099R was for a higher amount. Or they might miss it entirely. Luck of the draw. But if you don’t report the busted plan yourself, the IRS might not notice it for another year or so while late interest would continue to accrue. 

Submitted by James Long on Tue, 2024-02-27 22:03

Thx

Submitted by James Long on Thu, 2024-02-29 15:12

So the 5498 will not be received till May. This rollover obviously puts back the extra funds withdrawn. How do I claim the correct amount of total distributions now? as it will not match the 2023 2099-r from Schwab. So I will not get double taxed on that one withdrawal? Do I make some sort of entry now in this years filing or wait till next year?

Submitted by Alan - IRA critic on Thu, 2024-02-29 18:52

Assume your monthly distribution was 1000 and the annual total was 12000. If you roll back the 13th distribution within 60 days, your 2023 line 4a will show 13000, 4b will show 12000 and “rollover” shown next to 4b. This assumes you have no basis in your IRA shown on Form 8606.
Your 2024 distributions will continue as usual, so you would be taxed on 12000 for both 2023 and 2024 and your 72t plan will be intact. There is no double taxation.
You should move any automatic distributions away from the first or last week of the month, and recheck that your 2024 distributions will be correct because the January distribution may not have been made because it was distributed early on 12/31/2023. 
If you go ahead and complete the rollover, remember that you can only one of these over a 12 month period. Rolling back the distribution made on 12/31/2023 means that you will not be able to roll over any other distribution made before 12/31/2024, so double check in Dec 2024 that the correct amount for 2024 has been distributed.

Submitted by James Long on Thu, 2024-02-29 19:44

You are the man!!

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