L1: 72T confusion72T distribution questions
I divorced 5/2007.Per divorce agreement, two accounts were transferred from my husband, to me.An annuity (IRA) approximate annuitization value $335,273.Also, a money market fund (IRA) approximate, value $138,608.I separately owned an annuity (IRA) valued at $66,661. and mutual fund (IRA) valued at $6,000.
In 2007 (check dated 9/24/2007), I withdrew from the largest annuity in the amount of $14,029. and withheld 10% federal taxes and 5% state tax.According to the person that sold the annuities to us, this was the amount I needed to take, based on my life expectancy (at the time I was 51).In 2008, under the direction of the same advisor I withdrew $19,711., again withholding 10% federal and 5% state taxes.On 12/24/07 I received a letter from the IRS stating that I owed $1459.85.$1402.95 + $56.95 interest.Allianz will not code the 1099R with code #2, which would take care of this problem.They use code #1 and say your tax preparer must add Form 5329 and explain the exception.The Allianz representative told my tax preparer to put Code 72T Life Time Annuity in the description, which he did.Somehow, the IRS did not get Form 5329 from my tax preparer.After reviewing all of my documents the IRS sent me a letter dated 4/27/09 stating we are pleased to tell you we did not make any changes to the tax reported on your return.Û
Now I find out from Allianz, that I only had 2 free withdraws from my annuity.Allianz states that there are 3 ways to avoid large penalties from Allianz for future withdraws.
1.)Withdraw interest only of $9,045. per year (which is less than the amounts previously taken in 2007 & 2008), for 5 years, and then I will receive a lump sum disbursement for the balance of the annuity.I will only be 58 _ at that time.2.)Annuitize now and receive 11 annual payments of $31,394., (which is way more than I have previously taken.I may annuitize for more than 11 years, if I choose to. 3.) Leave the large annuity alone until age 59 _.I am lost and do not know what to do to correct this. Can you please help?D.O.B – 2/1/56
2009-10-26 17:30, By: plzhelpme, IP: [188.8.131.52]
L2: 72T confusionDistributions from IRA accounts do not qualify for QDROs from divorces. Therefore, any distributions from IRAs are subject to the 10% penalty for early distributions, in addition to the income taxes, unless all or some of the IRA investments are included in a SEPP 72-T “PLAN”.From the wording of your posting, it sounds as if you never did the documentation and calculations necessary for an eligible “plan”.There are other responders on this website who are more knowledgeable about annuities than I am.However, the annuity advisor may be confused. Single Premium Deferred Annuities are exempt from the 10% early distribution penalty if you elect “periodic distribution based upon life expectancy”. BUT, I do not think that this exception applies to distributions from annuities within IRAs.2009-10-26 21:20, By: dlzallestaxes, IP: [184.108.40.206]
L2: 72T confusionJust my thoughts, but…The IRS was being very kind. In 2007, a distribution (on a withdrawal basis)over life expectancy would have maxed out at about $12,250.27.The next year, the max would have been about $12,673. Not Even close to the numbers that you actually took. And a code of ‘2’ is not a safe haven – it only means that you have less of a chance to get caught in a bad plan.Short story, unless there are other facts that you haven’t posted, the person that gave youthe withdrawal amounts didn’t come close to the right numbers. I would start by making sure that if I had anything in writing from that individual that I would keep it is very safe place. The IRS can always revisit.And, based on my very quick calculations, I can see why the insurance company didn’t (and shouldn’t have)issued a code of ‘2’ because you probably don’t have a valid SEPP.In terms of the annuity, you signed a contractand the agent should have explained the surrender charges and the maximum annual withdrawal before incurring the insurance companies surrender penalties which are totally different and in addition to any resulting penalties to the IRS. Deferred annuity contracts typically area very bad choice as a method of funding a SEPP planNeither of the options offered will qualify asSEPP distributions as presented. At this point I would suggest that you seek competent counsel forboth the income tax implications and to see if you have any recourse againstthe insurance agent. Unless the insurance company sent you something in writing that said that what you were doing would qualify as a SEPP, you probably have no recourse against them.2009-10-26 22:31, By: Gfw, IP: [220.127.116.11]
L3: 72T confusionThank you for your response. I have tried to locate “competent counsel” in the Atlanta area. Anyone I have talked to, seems to fog over when I present them with my information. I have been to the IRS office in Marietta twice. Even though it states on the website an appointment is not needed, upon my last visit they said I needed an appointment and scheduled it for a month out. I talked with a partner in a CPA firm, he couldn’t help me. Do you know anywhere I can go to seek help?2009-10-26 22:48, By: plzhelpme, IP: [18.104.22.168]
L4: 72T confusionWhat is particularly disheartening here is that these problems were not caused by divorce attorneys awarding an IRA that was already part of a 72t plan. This one occurred after the IRA was awarded and includes a dual problem:1) Can’t get enough to live on out of the annuity without incurring annuity surrender charges.2) Complete failure to properly calculate a 72t distribution amount which will result in the IRS 10% early withdrawal penalty plus interest on whatever amounts were distributed to date.Only positive here is that there are only two years of prior distributions subject to the IRS penalties. But a new 72t plan cannot be reasonably started in 2010 without resolving the annuity contract restrictions. Either one of these problems may well justify a formal complaint about the advisor’s failure to recommend a proper product. Early withdrawal penalties prior to 59.5 are among the most basic issues to consider.Just for the record – the IRS letter was in Dec 08, not Dec 07, correct?2009-10-27 03:01, By: Alan S., IP: [22.214.171.124]
L5: 72T confusionHi Alan,Thank you for your post. In answer to your question, yes I received the IRS letter Dec. 08.pmn2009-10-28 00:45, By: plzhelpme, IP: [126.96.36.199]
L4: 72T confusionThanks to modern technology, finding someone local may not be your best alternative. For a start you can check out Bill Stecker, you can find his information here.I would start by dropping him an email or giving him a call. 2009-10-27 08:17, By: Gfw, IP: [188.8.131.52]
L5: 72T confusionDear Gfw,I will contact Bill Stecker by Friday. Thank you for the information.2009-10-28 00:47, By: plzhelpme, IP: [184.108.40.206]