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- Date of Birth: 2/1/1961
- Age: 60
- Single/Married: Married
- Annual cash needed year 1 (after taxes): $360k
- 72t Method: Fixed Amount
- 72t Distribution Start Date: May 2018
- Life Table Used:
- Stub Year (Y/N):
- Annual Recalc (Y/N): N
- AFR Rate:
- 72t Account Balance(s): $2MM; $2MM; $2MM
- Describe other assets if applicable (taxable, Roth, other income, etc.) and how much is in each account. This is bulk of my assets.
Hello-
I greatly appreciate the wisdom on this forum. I retired in 2018 and received some bad financial advice from an LPL advisor. I retired with $6MM in my 401k/ESOP. I put $2MM in an annuity with AIG; I put another $2MM in an annuity with AXA; I opened two IRAs directly with LPL, each with $1MM. I have/had 72t on ALL 4 accounts. Last year, I fired the LPL advisor and retained an advisor with an RIA. I combined the two LPL IRAs with $1MM each into one IRA with $2MM. So now I have 3 IRA/72t plans: The two annuities and one IRA(that was combined from the two brokerage accounts). I am now 60 years old and would like to withdraw more than I'm allowed under 72t. I realize this will result in a penalty, and am willing to pay that in order to have more access to my funds. My questions are as follows:
1)I would like to leave the annuities as they currently are and not disrupt the 72t. I would like to "break" the $2MM brokerage IRAs. Am I correct in that I will only owe 10% penalty/interest on the $2MM in brokerage IRAs since I'm leaving my other 72t plans(the annuities) untouched?
2)Since I combined the two brokerage IRAs into one last year, would I just calculate total distributions from those two IRAS(now one IRA) in order to get approximate penalty? In other words, if I took out $400k from those two(now one) IRAs since I started the plan, would I owe 10%(plus interest penalty) on that cumulative $400k distribution amount? I shouldn't have to include amounts distributed from the two annuity IRAs, correct?
3)If I "break" the $2MM brokerage IRA by withdrawing more than the 72t amount this year, is the 72t now terminated? I shouldn't owe the additional 10% penalty on future withdrawals once it is "broken"? How does the IRS know I want to terminate the plan? Are any/all future distributions also subject to the 10% penalty even though I'm now older than 59 1/2 and want to "terminate' the 72t? Is it even possible to "terminate" this 72t plan/IRA or will I still be subject to those penalties for the remaining years?
Sorry, I realize this is a complicated question. I really appreciate everyone's insight and expertise.
As you said, this is a complex situation. I will try to simplify it, but welcome others to agree or disagree.
First, if I understand you correctly, you have 3 "SEPARATE" SEPP 72-T plans. Accordingly, each of them stand alone, each having thier own SEPP 72-T "UNIVERSE" of accounts that generate annual distributions. Therefore, the 2 Annuity-backed plans are undisturbed, and therefore they are continuing, and not being terminated. Therefore, there should be no penalties because they are not being terminated.
Second, the 3rd SEPP 72-T plan was backed by originally 2 separate IRA accounts, which you later combined into a single IRA account. Again, that combining transaction would not have terminated that plan because all that was done was to combine the two accounts which were already under the same SEPP 72-T plan. Accordingly, if/when you break the distribution rules by taking more than the ANNUAL distribution, you will be subject to the 10% penalty on the cumulative distributions from the beginning in 2018, but only from this SEPP 72-T plan, and not from the other 2 Annuity Plans.
Third, I am not sure if the 10% penalty would be limited to only the distributions until you reached 59 1/2, or if it would be for the entire cumulative distributions until you "busted " the plan by taking out excess distributions.
Fourth, YES once you exceed the ANNUAL distribution amount, that SEPP 72-T plan is terminated.
Fifth, once you terminate that plan, then any distributions afterwards are not subject to the 10% penalty because you are already over 59 1/2.
Sixth, technically I don't know any way that the IRS has been tracking your SEPP 72-T plan. Surprisingly, I don't they have ever set up any tracking system. (As a side note, 75% of all Alimony deductions were never reported as Income by the recipients. This was one of the reasons that Congress changed the alimony tax rules.) HOWEVER, if you are ever audited by the IRS for any reason, and they look at your failure to report your busting of your SEPP 72-T plan, then the IRS could charge you with FRAUD, which would result in a 50% penalty for the unreported federal income taxes, which would be $ 40K x $ 20K penalty, since you had already paid the taxes on the distributions themselves in 2018, 2019, and 2020 (and possibly some in 2021).
Too bad the LPL financial "advisor" didn't properly advise you, or that you didn't understand his explanation of the rules. If the former, you have to decide whether or not to pursue legal action against him and LPL, or possibly getting them to agree to reimburse you for the $ 40K in order to make the issue go away, rather than their having to report it to their professional liability carrier, and possibly other agencies. I am not sure when the new rules took affect whereby these financial advisors became required to consider the client's best interest before their own commissions. However, since you apparently are okay with the annuities, that aspect might not be an issue despite their high commissions.
I fundamentally agree with DLZ. Saves me the typing. If you bust #3 you will owe the 10% surtax only on the actual distributions you took from #3 preceding your 59 1/2 birthday. Distributions taken after your 59 1/2 birthday are surtax free. Further, you will owe statutory interest on the computed surtax dollars computed against the 2018, 2019 and early 2020 distributions.
thebadger
Thank you SO much for the thoughtful and thorough answer. I REALLY appreciate it! This forum is great!
