Get out of 72t

[rworell]

I know all the rules on why you have to stay in until 5yrs or 59 1/2. What I want to know is I’ve received one 72t payment 9months ago. I now feel it is not what I need so I’m willing and ok to pay the penalties. What I’m unsure of is the penalties 10% plus interest on only what was received or on what would be the total of all withdrawals that would have taken place if I stayed in.

Thank you so much in advance!

Rich

 

[zinger1457]

It's an 'early distribution' penalty so only applies to what you received.

 

[njhowie]

I know all the rules on why you have to stay in until 5yrs or 59 1/2. What I want to know is I’ve received one 72t payment 9months ago. I now feel it is not what I need so I’m willing and ok to pay the penalties. What I’m unsure of is the penalties 10% plus interest on only what was received or on what would be the total of all withdrawals that would have taken place if I stayed in.

Thank you so much in advance!

Rich

You should think carefully about this and not do it unless you really need the remainder of the money now, and/or cannot follow the rules under any circumstances in completing the distribution plan.

What's changed since you started the plan, or what were you unaware of that has become an issue making you willing to pay the penalty to break the plan?

 

[rworell]

My advisor never advised me that I would loose all step ups on my annuity as well as any deferred credits. By taking this distribution I stand to loose well over $200,000 in possible gains that my step ups would have given me. That’s also if the market does not rebound in 5 years to make up for that. I’ll pay the penalty on my $15,000 distribution with interest all day long.

 

[pb4uski]

It may be too late. Did you work with an advisor to put the 72t in place? What sort of paperwork did you sign in order to get your first payment?

You need to consult with an expert in these but I'm not sure there is a way out. You might try contacting Ed Slott & Company for advice

 

[HenryD]

You need to consult with an expert in these but I'm not sure there is a way out. You might try contacting Ed Slott & Company for advice

OP: Here is a Q&A on breaking 72T early: https://www.irahelp.com/slottreport/what-happens-if-i-break-72t-payment-plan

 

[rworell]

Good link but it states if someone needs more of a distribution. I’m looking to be done! No more distributions at all.

 

[zinger1457]

If you want to stop just treat it like an early IRA distribution for this year only, the IRS doesn't know you're doing a 72t since it's your first year and you haven't filed taxes yet. You'll get a 1099 form from your custodian for the distribution, you will also need to fill out tax form 5329 to document the extra tax for an early distribution.

Edit: I just noticed you took the distribution 9 months ago so this will change things, maybe you can amend last years return, should definitely get some professional advice.

 

[SecondCor521]

Along the lines of what @zinger1457 posted, you can almost certainly just treat it as an early withdrawal by amending your 2021 tax return. All you would have to do is file a Form 1040-X, add a Form 5329 and pay the 10% early withdrawal penalty of $1500.

Since you were presumably treating the distribution as an SEPP, it should have already shown up on line 4b of your 2021 Form 1040 and thus you have already paid income tax on it. There would be no additional penalties for breaking the SEPP because you haven't made the second payment yet, so there's really no SEPP yet. I doubt the IRS will send you a bill for any interest.

Before doing the above, you might want to check what the code is in box 7 of the 1099-R you received for the $15K distribution. Is it "1" or "2" or some other code(s)? (Depending on what that code is may affect how you should handle the amended tax return.) And of course you should check with a qualified tax preparer who knows your situation.

 

[pb4uski]

So you think the OP, who has already filed a tax return claiming the distribution received 9.months ago was the first withdrawal of a SEPP, can just amend his return and effectively change it to a regular withdrawal subject to 10% early withdrawal penalty and that's it? Sounds way to easy to me... I'm skeptical that will be accepted.

 

[Sunset]

My advisor never advised me that I would loose all step ups on my annuity as well as any deferred credits. By taking this distribution I stand to loose well over $200,000 in possible gains that my step ups would have given me. That’s also if the market does not rebound in 5 years to make up for that. I’ll pay the penalty on my $15,000 distribution with interest all day long.

But you already took a distribution, so aren't the horses out of the barn already?

Did you ask your advisor exactly how will you loose all step ups (whatever they are) and the deferred credits (is this just interest on the money you didn't take out ?).
Won't these negative things affect only the money taken out, and not the rest of the money ? (or are you draining it all via the 72t).

Why do you suddenly not need the money for the next 5 years, that is a pretty dramatic change, and who advised you to get a 72t if it was not really needed ?

 

[SecondCor521]

So you think the OP, who has already filed a tax return claiming the distribution received 9.months ago was the first withdrawal of a SEPP, can just amend his return and effectively change it to a regular withdrawal subject to 10% early withdrawal penalty and that's it? Sounds way to easy to me... I'm skeptical that will be accepted.

Yes. It's my opinion that until the second P of a SEPP is taken, that the taxpayer has leeway to determine how the first P is treated. This can include either treating it as (a) the first P of the originally planned SEPP, (b) an early withdrawal subject to a 10% EWP, or (c) the first P of a different SEPP where the taxpayer changes the interest rate used or the method, as long as the math works with the new SEPP plan and the interest rate meets the requirements.

I did mention that the way the original withdrawal was coded on the 1099-R may affect things, and that the OP should consult a qualified preparer that knows their full situation, and I repeat those points here.

I generally take the position that generally speaking a taxpayer can take any position as long as it is not specifically disallowed by applicable tax law. This scenario is one example where if I were in the OP's position, I would apply that rule. There is no series of payments until a second payment is made, and there is no rule saying one can't change their mind after the first payment but before the second payment. The rules only require that any series of payments which eventually occur meet the method and interest rate rules set by 72(t). By canceling the SEPP before the second payment, OP never takes a series of payments, and therefore never is subject to the rules of 72(t). And by changing their mind, which again, taxpayers are allowed to do, and treating it as a single early withdrawal and paying both the income tax and the EWP via an amended 1040-X, has fully complied with the law in my view.

I also acknowledge that many taxpayers would not feel comfortable with that approach, and I respect their decisions and opinions.

 

[gauss]

1) It looks like "Steps Up's" are associated with Variable Annuities.

2) On the positive side, I would think that you could attempt to amend your return(s) (ie any where your took a distribution that issued a 1099-R as part of a 72t plan) and pay the associated penalties and interest and then not take any more non qualified distributions. There may be some legal precedence on this (ie treasury regulations, private letter rulings etc) that may negate my thoughts. It might be best to talk to someone like an Enrolled Agent to get their take on it.

-gauss