72t interest rate incorrect and multiple withdrawals in yr
L1: 72t interest rate incorrect and multiple withdrawals in yrIn 2007 I set up a 72t I think incorrectly and tried to redocument it the same year and I am not sure the assumptions or input data I usedare correct. I would appreciate any wisdom on the matter. In January of 2007 I rolled over $2,025,000 from a 401k and set up an IRA rollover at Schwab. I took an initialdistribution of $85,000 in February 2007 as I needed the cash with the intent to formalize the 72t assmuptions shortly thereafter. I further withdrew $53,500 in June 2007 to arrive at a total of $138,500 for the 2007 year ($138,500 I also took out in Janof 2008 and 2009)by using an interest rate calculation of 6%, the single life years number of 36 (I was age 48 at the time) per the IRS table and a balance of $2,025,000 which was the rolled over amount. This calculated to the $138,500 amount which I thought I would be fine although I took in two pieces in Feb and June. Since then I realized the interest rate was incorrect at 6% and I had to use the mid term table. I went back and looked at that period and since I started in Feb I had to use either Jan 07 or Dec 06 which would have yielded a 5.7% interest rate and changed the annual withdrawal to more like $135,000 instead of $138,500. However, since I took multiple withdrawals during the year with the second one being in June, could I use an interest rate from say March 07 where the rate was 5.84% or could I use a higher balance(adding back thefebruary withdrawal) from one of the end of months leading up to the second June withdrawal? If I use the March 5.84% with the end of May account balance the calculations come back almost identical to the $138,500……butI have a feeling the march rate wont fly? My calculations are close but obviously notaccurate and the fact I made two withdrawals in the year may further cloud the matter…any input and advice and experience would be deeply appreciated.2009-07-08 11:53, By: D, IP: [22.214.171.124]
L2: 72t interest rate incorrect and multiple withdrawals in yr>>calculated to the $138,500More like $133,582
>>could I use an interest rate from say March 07 where the rate was 5.84%No.The rateis based on the 2 months preceeding the date of the first distribution.
Best advice… get some professional help.
You are probably already beyond the scope of this discussion forum. It sounds like you are looking for ways to retroactively correct your mistakes and I don’t want this board to get to a point where we are giving advice on how to break/circumvent the IRS regulations.
2009-07-08 12:12, By: Gfw, IP: [126.96.36.199]
L3: 72t interest rate incorrect and multiple withdrawals in yrno… I was just looking for some advice so if you dont have any than just say so…dont need a lecture2009-07-10 01:56, By: d, IP: [188.8.131.52]
L2: 72t interest rate incorrect and multiple withdrawals in yrYou said that the federal mid-term rate was 5.7%. If that in fact was the actual rate, then you would be ok because the regulations allow you to use any rate that “does not EXCEED 120% of the federal mid-term rate”.
Please clarify what you meant as to the interest rate at that time.
If in fact 120% of the mid-term rate was the interest rates that you stated, then your mistake only cost you $ 40,000. I’m sure that professional advice at that time would have been much less expensive. Therefore, cut your losses by “busting” your plan now, and paying the penalty. Otherwise, the penalties can increase to at least $ 200,000 (10% of your $ 2 million), plus 10% of all growth and earnings, in addition to the regular income taxes, because your plan will never be in compliance.2009-07-10 02:53, By: dlzallestaxes, IP: [184.108.40.206]
L3: 72t interest rate incorrect and multiple withdrawals in yrDlz stated… You said that the federal mid-term rate was 5.7%. If that in fact was the actual rate, then you would be ok because the regulations allow you to use any rate that “does not EXCEED 120% of the federal mid-term rate”.
5.7% was the maximum 120% Mid-Term Rate that could have been used in January 2007- it can not be further increased by another 120%.2009-07-10 09:14, By: Gfw, IP: [220.127.116.11]
L2: 72t interest rate incorrect and multiple withdrawals in yrI just responded to “J” in the recent post from “72t Clueless” and my answer would also apply to you. First payment date locks in the moving parts.
Where did you come up with 6%? I read this site for one year before embarking on my SEPP plan in March 2006, and if I had not felt that I had mastered the basic requirements, like applicable interest rate, etc. I would have sought help.
I think you are in a hole that you cannot dig yourself out of at this point. More and more readers of this site have posted about being audited by IRS for their SEPP payments, even though they completed with 5329 form with their taxes.
In your case, if that happens, they will be able to determine that your plan is invalid and that’s when the penalties and interest are due. You may not be detected at all, but that is the risk you have to take. Pay now, (end plan and pay the penalties) or pay several years later after they go up $13k+ each year for the 10% penalty, plus accumulated interest.
Sorry I don’t have any better news.Incidentally, the author of this website is GFW, who was one of those already responding. KEN2009-07-11 14:28, By: Ken, IP: [18.104.22.168]
L3: 72t interest rate incorrect and multiple withdrawals in yrThanks for reply.The 6% Iused was based onmisreading and not understanding the 120% mid level rate…I thought 6% was within 5.7% which was December 2006 rate at the time.If I “bust” the plan I made withdrawals in 2007, 2008 and 2009. Can I send back the 2009 amount I took out in January whilewe are stillin 2009 – probably not? Also, should I have my tax person file ammended returns for 2007 and 2008? or is there another route to take? And since I had college expenses for my son in those years can I deduct that from the amount I took out to arrive at a lower number to pay the penalty and taxes on – my understanding is that college payments are OK under the early withdrawal?? Thanks for any input. 2009-07-14 15:24, By: d, IP: [22.214.171.124]
L4: 72t interest rate incorrect and multiple withdrawals in yrYou have enough dollars at risk here to consider seeking a PLR based on the Benz case, which preserved a SEPP after additional amounts were taken out for higher education expenses. You should talk to Bill Stecker or try to find another tax pro who specializes in letter rulings and understands 72t plan requirements.
In the Benz case, taxpayer already had a compliant 72t plan before taking out the extra funds, but you did not. Therefore, there is another hurdle to address whereby you would have to show SEPP calculations that were compliant through use of the correct interest rate max, and show that the additional amounts taken were due to higher education expenses. Don’t know whether this could come together or not since your actual interest rate was excessive. You might not have a busted plan until 2009 since you have no education costs in 2009. Lots of variable potential approaches. Bill Stecker’s address and number may be available on this site somewhere or someone else can provide it if you wish.
In answer to your question, you cannot roll back funds after 60 days to the IRA unless you qualify for a 60 day exception, and it does not appear that you do. Therefore, without a positive letter ruling, your plan is busted in 2009, which would call for a 5329 for 2009 and payment of the penalty for all 3 years. The IRS will bill interest on the first two years penalties. Then, you would amend your 2007 and 2008 returns to claim the education exception on the amount you paid for those expenses.2009-07-14 19:34, By: Alan S., IP: [126.96.36.199]
L5: 72t interest rate incorrect and multiple withdrawals in yrThank you very much for your reply. Just so I understand the process…..I file form 5329 for all three of the years of penalty 2007,8 and 9. Do I use the 2007 and 2008 forms (5329) or report all three years on 2009 of the 10% penalty? The form 5329 looks like an annual form and the instructions say if you are filing a form 5329 for a prior year you must use the version of the form. the instructions also say if you have other changes, file form 5329 for that year with Form 1040x, Amended tax return.
So it looks like I should file the form 5329 with each each along with amended return for the years 2007 and 2008? I think that would have the effect of reducing the amount I underpaid by being able to claim the college expenses and thus reduce amount of early distribution that would be subject to the 10%??
And then 2009 I can do normal return with form 5329 to report penalty.
Thanks again..just trying to clarify steps as I meet with tax people.
2009-07-15 21:58, By: d, IP: [188.8.131.52]
L6: 72t interest rate incorrect and multiple withdrawals in yrFollow the instructions on the forms or perhaps, get some professional help.
Make sure tthat you also understand how much of the educational expenses you wwill be able to claim – it may not be as much as you think.
2009-07-15 22:38, By: Gfw, IP: [184.108.40.206]
L6: 72t interest rate incorrect and multiple withdrawals in yrThe touchy part of this is communicating to the IRS that you are busting your SEPP, but still being able to get credit for the education expenses without having to wait for that credit. If the educution amounts are relatively small, it would probably be better to:
1) File your 2009 return with the 5329 busting the SEPP, and paying the 10% for all 3 years with that 5329. You would not need a 5329 for the earlier years except that you want the education cost penalty exception. With this filing, the IRS will understand that your SEPP has been busted and paid for.
2) Then, after this has been established, file the 5329 forms for 2007 and 2008 using the actual year edition dates. While this does not normally need a 1040X as well, it might be wise to include it and explain clearly that you are seeking recovery of your penalty on the education expenses and that penalty was paid with your 2009 return. You could send a copy of the 2009 5329 with it so the IRS would see that you are not looking for a refund on a penalty that you have not year paid.
Then, hope you get the refund before IRS bills interest on the late payment of the 2007 and 2008 penalties.
Meanwhile, you have some time to determine whether you want to pay for a PLR to see if you can still save the SEPP plan using the Benz decision. I view this as sort of a long shot, but Bill Stecker is probably the best qualified to advise you what he thinks your odds would be. I think he would have to establish that you had an eligible beginning account balance high enough to offset your use of a slightly excessive interest rate allowing you to show use ofa legal interest rate. Then you took out extra amounts to pay for the education expenses (or part of them). Because if you never had a valid plan to begin with, then Benz would not even be applicable to your situation.2009-07-15 22:51, By: Alan S., IP: [220.127.116.11]
L7: 72t interest rate incorrect and multiple withdrawals in yrAlan – thank you and I just emailed Bill Stecker for help and will get professional advice to put this all together before end of year. Just out of curiousity if I had gone through with my original plan (before i noticed this error) and went to the one time required minimum distribution method next year in 2010 (and assume I got a professional to do the calculation and it was correctly done each year to determine the annual payout), and then in 5 or 10 years time the IRS discovered the error in my original calculation would they levy the penalty and interest and such on the first three years at the higher amount and thenbe fine withthe required minimum distribution amounts or would they say the plan was non compliant from the start and assess the penalty on both the payouts from the first 3 years and then the payouts under the change to the required minimum distribution. Just wondering what I would have been looking at had i not discovered the error2009-07-16 01:11, By: d, IP: [18.104.22.168]
L8: 72t interest rate incorrect and multiple withdrawals in yrUnfortunately, the plan would be bust from day 1 and the penalty and interest would be due from day 1. Bill can put you on the right path, but I would really like to hear the outcome – the IRS isn’t very forgiving.2009-07-16 01:33, By: Gfw, IP: [22.214.171.124]
L8: 72t interest rate incorrect and multiple withdrawals in yrGood question, and I cannot recall either this question being posed before or any IRS or letter rulingaddressing this situation.
Partially with respect to the financial meltdown, the recent trend of IRS rulings seem to be more taxpayer friendly, barring themost recent onethat busted a plan for partial transfers. It is true that the one time switch would result in individual distributions years based on the RMD (if done right) being compliant with new RMD plans initiated that year. That would be aplausible argument, but I would not feel particularly safe betting on it because technically the SEPP remains the same plan that began out of compliance.
Perhaps gfw or other poster here has seen something relevant to this issue.
2009-07-16 01:46, By: Alan S., IP: [126.96.36.199]
L9: 72t interest rate incorrect and multiple withdrawals in yrProfessionally, I’m becoming increasingly uncomfortable at the trend of recent postings. It seems to me like people are trying to get advice, or approval, of their schemes to “play the system” by retroactively establishing or changing the facts for their SEPP 72-T plans which they realize are or were not in accordance with the rules, and because the documents were never sent, or even required to be sent, to the IRS, so they seem to think “how will the IRS know?”.
I hope that these posters realize that the IRS monitors this, and other tax list-serves. Anyone suggesting or advising ways to circumvent the tax laws can be deemed to be in violation of Circular 230, with very expensive resultant penalties.2009-07-16 02:17, By: dlzallestaxes, IP: [188.8.131.52]
L10: 72t interest rate incorrect and multiple withdrawals in yrOK, I guess I am the offender that triggered the suggestion of circumventing tax laws. I do not participate in such activity, so let me try to explain my rationale.Following is copied from 2002-62:
“Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year. ”
No where in this or any other IRS Notice or letter ruling is there a statement of a deadline date for this “determination”. Above statement simply indicates that these are “determined once for the first distribution year”, not WHEN they must be determined. In addition, on this site the Sample SEPP Form provided follows a clear statement that NO written documentation is even required. It is justhighly recommended to reduce fatal errors or trying to figure out later what you did, ie. just common sense to do so and I fully agree with that. Unfortuneately, these rules are complex and people make mistakes including tax pros. Further, in Sec 72 there is nothing to suggest atime limit to adhere to to avoid modification.
I look atapplyingwhatever flexibility existsasan attemptto help those in a jam with big bucks on the line that may be costing them sleep, when in fact what theyhave taken out actually meets IRS requirements had they just used a different date for their account balance within the allowed window. The IRS provides a potential account balance window as long as 6months and an interest rate window of two months plus the number of days in the first distribution month. The interest rate months do nottie directly to the account balance date that is elected. The result is that thereare thousands of potential distribution amounts that would all meet IRS requirements of beingsubstantially equal if you are able to provide the IRS with thedocumentation showing the proper combination of factors when they ask for it. Infact, virtually all elements of a tax return are based on filing an accurate and timely return using IRS Regs. or tax code rather than documenting a pre plan before you even act. If anyone can show me where the IRS evensuggests locking down all the details before ordering a distribution, I will be happy toconform with that suggestion.
Posters are advised all the time here that if they used the May rate for a July distribution and the June rate was higher, that it’s OK to use the June rate. We don’t expect them to bust their plan simply because they initially wanted to use the May rate and discovered the June interest optionafter the first monthly distribution. We also do not hesitate to tell them in December that they can take out 12 months worth when they only intended to take out 6 months when they started in July, or if they took out 7 months in error that they can roll back 1 month.
Finally, since this is gfw’s site, he may simply not want any time allocated to “error remediation”, and that is certainly his call.2009-07-16 04:54, By: Alan S., IP: [184.108.40.206]
L11: 72t interest rate incorrect and multiple withdrawals in yrAllan… you are right, it is my call. “Error remediation”is one thing… telling someone how to retroactively make changes to their plan with no basis is something else and not what this site is about.
Dlz is right, the IRS does monitor this siteand it would not be difficult to trace any post back to any given individual – the Internet is not a secret place.
Therefore, I am asking you, and anyone else who posts here to stay away fromthe subject of retroactive “error remediation” unless you can come up with any factual basis in the regulations, rulings or noticesthat state certain decisions can be made after the date of the 1st distribution – it doesn’t exist.
To date we let posts freely make it directly to the forum.Lately I have been thinking that wemay have to start reviewing any posts before they appear – something that I really don’t want to do.
2009-07-16 10:39, By: Gfw, IP: [220.127.116.11]
L11: 72t interest rate incorrect and multiple withdrawals in yrI don’t even remember who, or how many, posters were going down the slippery slope, and pff of the straight and narrow.
But, you make aninteresting point in that Section 2(c) limits the interest rate to the 2 months preceding the month the plan “starts”, while Section 2(d) allows the flexibility of the preceding 6 months of ending account values, or any date in between that can be documented. Further, the “start date” probably does not have to be the 1st of a month, but can be any date within any of the applicablemonths.Obviously the start date must precede a distribution date, but I guess that if in this posting scenario he had taken an initial distribution, and then a full year’ distribution later in the same calendar year, then there could be a case for the PLAN start date to be some time between those 2 dates. Then the first distribution would have been subject to the 10% penalty, but all future distributions would not be subject to it, unless a future event busted it.2009-07-16 20:49, By: dlzallestaxes, IP: [18.104.22.168]
L12: 72t interest rate incorrect and multiple withdrawals in yr>>then there could be a case for the PLAN start date to be some time between those 2 dates.
The plan start date is equal to the date of the 1st SEPP distribution. Once that distribution is made, all variables – age, interest rate, balance and method – are locked.
Distributions prior to that date are not part of the SEPP plan. Distributions after that date and until the end of theSEPP are part of the plan. It really isn’t all that complicated.
2009-07-16 20:59, By: Gfw, IP: [22.214.171.124]