72T Termination question??

[nomidair]

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

 

[frayne]

I wouldn't see why not.

 

[CyclingInvestor]

yes

 

[zinger1457]

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.

 

[CUinFl]

Not sure I understand why you would want to do this....

 

[frayne]

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.

 

[nomidair]

Thanks all!!

 

[zinger1457]

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.

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:

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!

 

[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

 

[frayne]

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.

 

[zinger1457]

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

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.

 

[frayne]

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.

 

[gauss]

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.

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