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72T Termination question??
04-02-2014, 02:51 PM
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#1
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Confused about dryer sheets
Join Date: Apr 2014
Location: Hanahan
Posts: 2
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72T Termination question??
I started 72t disbursements as of Jan. 2014. Can I basically cancel it, take a large withdrawal, pay the penalty and taxes, then restart 72t with a new balance and 5yr time limit?
Thanks
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04-02-2014, 03:49 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Oct 2002
Location: Chattanooga
Posts: 3,878
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I wouldn't see why not.
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Earning money is an action, saving money is a behavior, growing money takes a well diversified portfolio and the discipline to ignore market swings.
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04-02-2014, 07:34 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Location: Los Angeles area
Posts: 1,708
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yes
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learn, work, save, invest, fire
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04-03-2014, 08:00 AM
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#4
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 3,222
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Just make sure you go through the proper procedures for reporting and paying the required penalties for a broken 72t to the IRS. If the IRS finds out in an audit that the 72t was broken and you didn't report it you could be subject to additional penalties besides the normal 10% and interest penalty.
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04-03-2014, 10:20 PM
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#5
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Recycles dryer sheets
Join Date: May 2013
Location: Kouts
Posts: 58
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Not sure I understand why you would want to do this....
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04-04-2014, 06:16 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Oct 2002
Location: Chattanooga
Posts: 3,878
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Zinger, the only way the IRS knows you are doing a 72T is if you fill out a form 5329 with an exception noted to avoid the 10% penalty. Breaking the 72T would mean just filing the 1099R with the box 7, code as 1. It doesn't require a special notification to the IRS.
__________________
Earning money is an action, saving money is a behavior, growing money takes a well diversified portfolio and the discipline to ignore market swings.
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04-05-2014, 05:16 PM
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#7
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Confused about dryer sheets
Join Date: Apr 2014
Location: Hanahan
Posts: 2
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Thanks all!!
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04-06-2014, 06:08 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 3,222
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Quote:
Originally Posted by frayne
Breaking the 72T would mean just filing the 1099R with the box 7, code as 1. It doesn't require a special notification to the IRS.
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I don't have any personal experience breaking a 72T but think it's a little more involved then just checking a box on a form. From 72t.net:
Quote:
Q. How do I report a broken SEPP (2009 Tax Year)?
A. Start with IRS Form 8606 - if it doesn't apply (no non-deductible contributions), don't use it.
Then go to Publication 590 (as directed by the instructions for 8606) to the section "Is it Taxable?".
I'll save you a little time - go to page 50, top right...'Recapture tax for changes in distribution method under equal payment exception.'
Then follow the instructions in Publication 590 to use IRS Form 5329 and report the transaction on IRS Form 5329. 'Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Do not write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form'.
The instructions for line 4 of 5329 state to report it on IRS Form 1040, line 58 or IRS Form 1040NR, line 54.
It is never simple and the instructions are seldom in one place. Good Luck!
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04-06-2014, 06:21 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,594
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I think the point in this case was that if the the first distribution was in Jan 2014 and taxes have not been filed (ie normally due in Apr 2015), then the 72t has not been formally started yet. Breaking it, in effect, would be equivalent to not starting it.
-gauss
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04-06-2014, 07:17 AM
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#10
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Thinks s/he gets paid by the post
Join Date: Oct 2002
Location: Chattanooga
Posts: 3,878
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If you break a 72T at any time you will be required to pay the 10% early withdrawal penalty as you would have normally if you had taken a distribution before 59.5 years of age, plus a late penalty. To answer the OP's question, no IRS notification should be required if he pays the 10% penalty on his 2014 tax return.
__________________
Earning money is an action, saving money is a behavior, growing money takes a well diversified portfolio and the discipline to ignore market swings.
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04-06-2014, 07:45 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 3,222
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Quote:
Originally Posted by gauss
I think the point in this case was that if the the first distribution was in Jan 2014 and taxes have not been filed (ie normally due in Apr 2015), then the 72t has not been formally started yet. Breaking it, in effect, would be equivalent to not starting it.
-gauss
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Yes, I see your point but the custodian will still issue a 1099-R for any distributions, even if it's just one. My concern would be if they mark distribution code as 2 on the 1099R because that's how it was initially set up.
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04-06-2014, 08:30 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Oct 2002
Location: Chattanooga
Posts: 3,878
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Zinger, just FYI, I did a 72T and Fidelity marked all my 1099Rs as 1 (normal distribution) in box 7 and that is why I was required to fill out the 5329 and note the SEPP exception to avoid the 10% penalty.
If a person breaks a 72T a couple years in, then I agree with you he/she would need figure the recapture taxes which I believe would amount to the 10% penalty in addition to an interest penalty.
__________________
Earning money is an action, saving money is a behavior, growing money takes a well diversified portfolio and the discipline to ignore market swings.
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04-07-2014, 04:44 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,594
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Quote:
Originally Posted by zinger1457
Yes, I see your point but the custodian will still issue a 1099-R for any distributions, even if it's just one. My concern would be if they mark distribution code as 2 on the 1099R because that's how it was initially set up.
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Zinger,
Thanks for clarifying the scenario for your concern.
It sounds as though many custodians (but perhaps not all) will refuse to issue a 1099-R with box 2 and the associated lack of 10% withholding.
Either way, OP should be able to review the distribution from Jan 2014 and determine if 10% was withheld or not. If 10% was indeed withheld then a 72t plan does not yet exist IMHO.
-gauss
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