Final, stub year

Yes. But, if you want/need money sooner than 9 monthly payments, you can take them quarterly, or all in January. You just cannot take any more than the 9/12 of the annual amount for 2021.

This is confusing: IRS web site says five full years, which is different than 60 months. 

According to this info below, from the IRS, it implies the taxpayer cannot stop at month 60, but must keep on going for five full years.

When do I fulfill my obligation to take substantially equal periodic payments?

The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

I bolded the part that concerns me ... and I assume the IRS left out the word fifth "annualized" payment

"Yes. But, if you want/need money sooner than 9 monthly payments, you can take them quarterly, or all in January. You just cannot take any more than the 9/12 of the annual amount for 2021.

More confusion here ... so let's say kirk234 takes 9/12 of the annual amount, and he does so in a lump sum on January 10th of 2021 so as to get that cash in hand.  It would seem he has just met his obligation under the 72t plan, and he is done with the plan. Congratulations!  He then makes doubly sure he is done by alerting his custodian that he wants no further distributions, the plan is officially as far as he is concerned, he withdrew 9/12 in one lump sum order to close the books on the 72t. 

"You just cannot take any more than the 9/12 of the annual amount for 2021."

Is he really frozen out of anything more in the year 2021?

Let's assume kirk234's daughter wants to buy a house in June of 2021, and he takes out $50,000 to help her with her home purchase. He's over age 59.5, due to his stated age.  Why is it he "cannot take any more than the 9/12 of the annual amount for 2021." He satisfied his 72t plan in the final stub year via that lump sum on January 10th, and now he's doing a regular 50,000 withdrawal as a 60-something year old father.

"kirk234 said: On 20 Oct 2021, I believe my SEPP will be complete and I will be free to withdraw from that account as I please."

Why cant you take additional withdrawal of 10,000 on July 1st?  This would be a normal withdrawal, running parallel to your 72t withdrawals if you liked doing the 72t distribution monthly.  Or maybe not even in  parallel - what if you had cleaned out the stub year by taking the full remaining payments all at once, in January as suggested by dlzallestaxesmsn.

If the minimum financial obligation under your 72t (aka distributions) was met in during that stub year via your monthly withdrawals, or if you met that minimum obligation all at once in January, are you really prevented from touching your IRA until the magic date of October 20?  I would think anything withdrawn above and beyond your 72T obligation would simple be reported separately on  your 1040 as a regular distribution.

The way I see it, you're going to get a 1099, or maybe two 1099s.  One of the 1099's will have your 9/12th worth of the annual 72t amount, representing that final stub year.  Any other distributions will not be coded as "early distribution" on a 1099.  So why wait until October for extra cash in hand? The 1099 only provides an annual summary it does say whether you grabbed money in October, or September, or July.

In summary, my question is: once the 72T stub year distribution has been met (all at once, or monthly), is a tax payer not allowed to touch the account for the rest of the year (if he took it all at once in Jan), or is he not allowed to touch it until a specific day of the stub year (Oct 20)? 

The 1099 will not be that granular, it will just report what you took during the year. The only granularity I see is one 1099 might disclose your 72t disty, and the other 1099 might disclose a normal disty. But those 1099s will not be providing a month-by-month schedule, so why wait to take a normal disty?

I hope that you understand that English is a tricky language. If you take 5 ANNUAL payments starting 4/1/2016, then you will take the 5th ANNUAL PAYMENT on 4/1/2020, which is the 49th MONTH, NOT YHE 60TH MONTH. The IRS website does not say 5 ANNUAL PAYMENTS, it says 5 FULL YEARS, i.e. 60 MONTHS.

After you have completed 60 months from your 1st Payment, and if you are over 59 1/2, then your PLAN TERMINATES. After that, you can take any amount from -0- to the entire balance in the IRA account(s) that were included in your SEPP 72-T PLAN UNIVERSE. I guess I didn't make myself clear. I meant that he couldn't take any more UNDER THE PLAN than the remaining 3/12. Once the PLAN ENDS, he can do whatever he wants to do. In actuality the PLAN would no longer exist. I usually suggest waiting until the following month to avoid any miscalculation of the termination date.

Sorry, I was confusing 2 different postings. Yours started 10/20/2016, so your plan ends on 10/20/2021. I wouldn't take more than 9/12 of your annual distributions thru 9/30/2021. If you want to take any more, then wait until Nov 2021 just to be safe that the financial institution doesn't report a payment between 10/20 and 10/31/2021 as part of the SEPP 72-T distributions.

I have revised my answer accordingly. If you take 5 ANNUAL payments starting 10/20/2016, then you will take the 5th ANNUAL PAYMENT on 10/20/2020, which is the 49th MONTH, NOT THE 60TH MONTH. The IRS website does not say 5 ANNUAL PAYMENTS, it says 5 FULL YEARS, i.e. 60 MONTHS. The plan does not terminate until 10/20/2021 which is 60 months from the 1st distribution, regardless if it was a monthly, quarterly, or annual amount.

I agree it is tricky. Fidelity for example will not shut off the plan even if the calendar says the plan has terminated, it's up to me to tell them "no more".

I am planning to take the final three months (3/12) which I am obligated to take in the year 2021, all at once as an annualized payout, lump sum, in January. Once I have done this, I will have taken the equivalent of 60 distributions.  It's just that in my final stub year, I chose to take it all at once. All previous years were monthly. This amount will get reported on a 1099, and this amount will go on the proper tax form 5329.

I also plan on taking a regular non 72t distribution in February. Because I will be 59.5 by then, Fidelity tells me this particular distribution will be reported on a second 1099 ...  that they will start a fresh 1099 reporting cycle due to my age. Whatever appears on this 1099 will not transfer to tax form 5329.

mlvmlv -- You do so at your own peril. As I said it is 60 MONTHS, NOT THE EQUIVALENT OF 60 MONTHS' DISTRIBUTIONS. I recommend that you wait until after 4/1/2021, and maybe until May 2021 to be safe. Your plan does not end until 4/1/2021 regardless of when you take the equivalent of 5 years or 60 months of distributions. And your plan does not end just because you tell Fidelity that it ends when YOU think it does.

Y0u make a good point, but I can't get past the concept that the 1099 doesn't show the month of the draw.

If the plan does not end until 4/1/2021, and I play it safe and do a withdrawal in May 2021 - the 1099 is only an annual  summary. That summary does not indicate whether I took a "regular" distribution on May (safe), or April (less safe), Feb (in peril)

The best explanation I have received, but not sure if it is 100% accurate, is if I take a lump sum on January 4 to "exhaust" my 72t stub year, this amount will show up on a 1099 coded with an "early" distribution as it always has.

If I take any further distributions, say per telephone instruction to the trustee on Feb 1 , it will show on on a separate 1099, and will not be coded as an early distribution assuming I am over 59.5 at the time it is distributed.

One 1099 will have a summary of "early" withdrawals, summarizing stub year aggregate w/d

One 1099 will have a summary of "regular" withdrawals, summarizing  calendar year w/d after required age of taxpayer

Neither 1099 will provide a month by month breakdown

That is correct. You should get two form 1099-R, one under your SEPP 72-T for which your accountant will file a form 5329 to indicate that those were "early distributions" for which there is a SEPP 72-T exception, and then a second one for distributions AFTER YOUR PLAN ENDS ON 4/1/2021, for which it will not be necessary to file a form 5329 because they were not taken under your SEPP plan, and were taken after you reached 59 1/2. The 1099-R forms NEVER have any information about months in which distributions were taken. The IRS trusts that the financial institution is filing the 1099-R forms correctly, just like it trusts that all other forms are filed correctly, like W-2s, 1099-INT/DIV/B, 1098, etc. by banks, brokerage firms, and mutual fund companies, etc. The form 5329 form has to be used in almost all cases of early distributions now because most brokers and mutual fund companies have decided to code them all as "exception unknown or undetermined" because they do not want the responsibility because they do not have any documentation of your age (i.e. birth certificate) or if you have any other IRA accounts as part of your SEPP UNIVERSE with a different institution.

Accordingly, "it is what it is."

OK, thank you.  Frustrating, because I am relying on the trustee, who has zero liability. They tell me a new 1099 gets issued for anything I do after I turn 59.5, and I turn 59.5 prior to the anniversary date of my plan.

I realize I can take them (Fidelity) out of the equation by just waiting until May, as by then I will have covered every base in terms of anniversary, and age.

Not directly related, but I am surprised more people do not utilize the 72T ... no guarantee we are alive tomorrow. In my case, the 72T allowed me to grab an opportunity I otherwise could not have funded.

Personally, I think the "don't you dare touch an IRA before 59.5" is very poor advice.  There are very good reasons to touch an IRA!

I have clients who have "retired" in their 50's. If they are 55, or will become 55 during the calendar year, then there is no need for a SEPP 72-T because distributions from 401-Ks or 403-Bs in those situations are not subject to the 10% penalty because they have "separated from service", which is a different exception to the 10% penalty. There are another dozen exceptions as well, under certain circumstance. There is also another little known IRS provision called NUA (Net Unrealized Appreciation in Employer Stock) that can save a lot of taxes. (I saved a client over $ 100K on a $ 750,000 401-K when he retired.) 

In addition, for early retirees, I do a lot of planning for taking IRA distributions up to the limit of their STANDARD DEDUCTIONS, so that the tax is only the 10% early distribution penalty, especially if they have kids in college so they can also benefit from the Child Tax Credits, and the Education Tax Credits. A $ 2,500 credit in these situations is equivalent to another $ 25,000 that can be taken from the IRA without any tax liability. If a client doesn't need the money because they have non-retirement accounts or funds, then I recommend doing ROTH CONVERSIONS. Furthermore, once clients reach 59 1/2 I recommend doing IRA Distributions and/or ROTH CONVERSIONS, often up to the limit of the 22% or 24% tax bracket because of the SECURE ACT, especially if they have children who will ultimately be required to take distributions over 10 years taxed on top of their earnings.

Your clients are fortunate to have you! My CPA doesn't really understand the nuances of a 72t, but was upfront about saying that, and said that he couldn't advise me as to what to do.

Luckily you found the original SEPP 72-T website, and this successor (who actually found me, and lives about an hour away and became my client).

I am always amazed as to how few CPAs, EAs, and other tax "professionals" know anything about SEPP 72-Ts and NUAs, and do not get involved in all of the other areas of "PLANNING DURING RETIREMENT", as well as Estate Planning, Educational Funding, etc. Even though I am almost 82, my clients made me sign a contract that I have to survive them because they can't imagine having to try to find a replacement. That is why I am still "practicing", and some day I will learn enough. (I am required to get 40 CPE hours a year, and I get 80 hours per year.)

You are in rare company, God Bless you

Thank you @dlzallestaxesmsn-com.  I didn't realize my 18 Nov 2020 post generated more of a conversation with another grateful user. 

I'm almost set to submit, just after new year's, the distribution request that I described based on my 31 Dec 2020 balance, divided by my life expectancy, and prorated 9/12.  The main thing that bothers me is knowing my total distribution would be different if I hadn't prorated.  I guess I'm mistakenly thinking all paths should lead to the same number.  That even made me wonder if my final stub year distribution should be the rest (9/12) of my first year distribution annualized, instead of basing my final year distribution on my 31 Dec 2020 balance.  Care to comment on that errant thought?

Thanks again.

Yes, you are recalculating every year, so you will calculate the 2021 ANNUAL AMOUNT, and then take 9/12 for 2021. BUT, you cannot take any more or less until after 10/21/2021 when your plan ends.