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Penalty for breaking 72t plan
Hoping this is a simple question.
I started a 72t plan this year after I took an early retirement offer from the federal government. At the time I set up the plan, I elected to prorate the first year and set up payments on a monthly basis after my retirement. I retired 07/31/19, and set up my plan so the the first payment was received on 10/08/2019 in the amount of $2182.00. Under the plan it will receive a gross distribution of $6,546.00 through the payment on 12/08/2019.
The federal agency I retired from has unexpectedly made an overture to me about returning to work as a retired annuitant in late December 2019 or early January 2020. Though I really, really don't want to, I'd probably accept the offer as it would allow me to provide needed immediate financial assistance to my recently separated sister and her children beyond what i can provide now.
The rub is this: because I funded my SEPP plan from my federal Thrift Savings Plan (TSP) without rolling it over into an IRA, the first paycheck I receive from the federal government will bust my SEPP due to the fact that the government automatically contributes 1% of salary to the TSP as part of the FERS retirement system even if I elect not to contribute. As a result, the plan would bust due to the small amount of additional money being added to the principal of the account after establishment of the SEPP.
I'm considering just terminating the plan before 12/31/19 and paying the 10% penalty ($654.60). By doing so, I could then re-establish the plan later in 2020 after I stop working again.
My question regards the penalty/interest involved. I'm presuming that the penalty would be considered due and payable with my 2019 federal tax return filed in April 2020. Would there be interest due on the penalty as well, or would I just owe the penalty since I am terminating the plan in the same year it was established?
Your comments are appreciated on the issue.
I agree with your decision to just terminate the SEPP 72-T plan. However, I would cut my losses sooner by terminating it today, and not take the Nov and Dec payments. That way your penalty would be only $ 218.20 instead of $ 654.60. You are correct that the penalty is not due until you file your 2019 tax return. Assuming that your tax withholdings and/or estimates are adequate, you would not be subject to interest on this penalty. I think, but I am not 100% sure, that you may be able to repay the $ 2,182 October 2019 distribution within 60 days, and in that case you would not have any penalty. I think that this would qualify under the 60-day rollover rules, and would negate it as having been distributed. (Alan may be able to respond accordingly.)
I appreciate the response. I should be good for tax withholdings to cover the penalty as I was withholding single-none and also had 25% withholding on a substantial annual leave payment towards federal taxes as well.
Unfortunately, refund is not an option as it is not possible to deposit money into the federal TSP except through payroll deductions for active employees (it is a 401k). Granted, the TSP isn't the greatest option for setting up a SEPP 72t plan (it only pays whole dollar payment amounts, so you have to manually use the amortization formula to find an interest rate that will result in a whole dollar payment after 3rd digit penny rounding) but it can be done. Though I could (and in the future can, if I re-establish the plan) have rolled over to an IRA, by doing so I'd be giving up advantages that IRAs generally can't match - extremely low fees, a bullet proof safe haven option in the event of a major market downturn (the TSP G fund, which earns very little but is currently guaranteed not to loose money), and ability to re-distribute the plan assets up to twice monthly with unlimited transfers to G-fund between the various TSP funds at no cost to me.
Since I need the funds until they make an offer, what I plan to do is to stop the automatic issuance of payments right after the December payment due 12/06/19 (I can do it through their website). If the job falls through (I don't feel like it will, but with government you just never know), I can still do the January 2020 payment manually to maintain the 72t plan and then re-establish the automatic issuance of payments in February 2020. On the other hand, if I go to work, I'll have terminated the plan in 12/19 so that I can re-establish a new one in 2020 if I need to after I stop working (the 120% midterm rate will probably be awful, but it is what it is).
My only concern was how interest on penalties might be applied as I have never dealt with a penalty in my life.