72(t)

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L1: 72(t)Currently, I am receiving monthly payments from my 72(t). I have run into an emergency situation where I need to withdraw monies from it. The 72(t) is with Fidelity though I have a Financial Advisor. The Advisor was not as informative as Fidelity and I am trying to find out if someone else has had the same problem as follows:
Fidelity informed me that I could withdraw money from the account but…I would have to pay a 10% penalty on the money that I withdrew, taxes on the money to be withdrawnplus taxes on the money already withdrawn (been receiving it for a year now). Fidelity would then close out this 72(t) account and re-open a new one. I believe they also said that this would only be a one time thing I could do. The penalty and taxes still does not add up to the money that it is costing me to borrow to try and get out of the current crisis. My Advisor told me a totally different scenario that I would be taxed and penalized on the whole 72(t) account which really did not make sense because even though I do not understand why IRS does some of the things they do I did not picture them penalizing or taxing me on money that I was not actually removing.
If anyone else out there has any experience with this type of a problem please please let me know. My financial advisor is very smart regarding what funds to put money in but she was not very knowledgable about the 72(t) until I approached her about it prior to retiring.

Thanks, AW

2007-06-28 19:10, By: AW, IP: [75.117.54.173]

L2: 72(t)This may not cover your entire concern, but let”s break this down into two areas:
1) Ordinary income taxes – you will have to include your distributions in your income in the year you take them regardless of whether they are the correct amount or not. So there is nothingdifferent about this part whether you are in a 72t or not.
2) The 10% early withdrawal penalty – this is the downside of busting your plan. You will owe the 10% on all funds that you avoided the penalty on back to the first year of the plan. Obviously, then it is much more costly to bust the plan toward the end of the period than in your first or second year. The IRS will also assess interest on these penalties based on the period of time that the penalty was paid beyond when it would have been due.
3) The year following the year you take the extra amount can be the start of an entirely new plan with a new 5 year or age 59.5 modification date. There is no penalty on the remaining years of the original plan, only the past and current year.
4) If you had another IRA outside the 72t account, you could take the emergency distribution from it and pay the penalty, but your 72t account would not be affected. But if you only have one account, this flexibility does not exist.
5) If your emergency situation is one that has it”s own penalty exception (eg medical over 7.5% of AGI), the penalty on the current year might be reduced or eliminated, but the onlyexemptions from the past year penalties are if you die or are totally disabled.
2007-06-28 22:50, By: Alan S., IP: [24.116.66.98]

L2: 72(t)The first answer was superb, very thorough, and very clear. If you want additional thoughts of alternative solutions to your situation, it would be helpful if you indicated the nature of your crisis, other assets (home, vacation home, rental property, non-retirement investments, other retirement accounts, etc.) that might be used in some way to handle this crisis. As the other posting indicated, there are other exceptions to the 10% penalty that you might qualified to utilize.2007-06-30 10:55, By: dlzallestaxes, IP: [151.197.23.220]