72T withdrawal in midyear
L1: 72T withdrawal in midyear
I have a tax client that has posed a question concerning a
72T withdrawal beginning in July of 2008. He is 52 years old and has set up a monthly withdrawal of $3000 until he reaches 59 1/2. He also plans on
withdrawing $42000 before his first monthly amount to pay off high interest debt etc. Total withdrawal will be $60000. The question posed is; How much of the total of $60000 will be subject to the 10% early withdrawal penalty. He was told by a financial planner that his annual 72T withdrawal will be $36000, even if he only takes out 6 monthly amounts of $3000 each part of the lump sum amount. I have read that since the lump sum amount was withdrawn prior to the beginning of the annuitization period, the entire $42000 would be subject to the 10% penalty and only the monthly withdrawals would count toward the annual 72T
withdrawal. Any response on this would be appreciatedow HowHow
2008-06-22 18:15, By: wag, IP: [220.127.116.11]
L2: 72T withdrawal in midyearThe client must take the distributions in a certain order in order to have a valid plan.1) Take the distribution subject to penalty first – in this case 24,000. Best to take it in June and then start the 72t in July.2) The 72t must use the account balance post the above distribution, ie the balance ending onsome day after the 24,000 distribution.3) Then start the 72t in July and take out the full annual amount generated by a proper calculation. If that calculation produces 36,000, then take out 36,000 or 6,000 per month. Then remember to cut it to 3,000 per month next January.
The round number of 3,000 raises a question, since it takes some work to jigger the interest rate and account balance to arrive at a round number. It makes me wonder if the calculations are being done correctly. SInce the penalized distriburtion will have a direct affect on the balance remaining for the 72t, it may have to be increased to handle the debt payoff, but that increase will reduce the future monthly 72t payout. Hopefully, there are sufficient total funds available to accomplish both.2008-06-22 19:22, By: Alan S., IP: [18.104.22.168]
L2: 72T withdrawal in midyearThank you for your information. The rounded numbers were figures given to me, I assume to simplify the question. You did suggest bumping up the withdrawal from $3000 to $6000 and then adjust down the monthly back to the initial $3000 for 2009 and beyond. Would this not be considered an alteration of the initial withdrawal agreement, thus negating the 72T benefit????2008-06-23 13:19, By: wag, IP: [22.214.171.124]
L2: 72T withdrawal in midyearNo, this would not be a modification. In the first year of the plan the taxpayer has a choice of taking out the full annual calculation or the pro rated amount based on the starting month. Since he needs more funds to pay down debt, he should opt for the full 36,000 as his 2008 SEPP distribution. That will reduce the amount taken out earlier and subject to penalty.
3,000 per month starting in January would produce another 36,000 for next year. For any of these years, the month of distribution does NOT matter. The critical requirement is taking out the correct annual amount. Therefore, whatever amount he opts to take this year can come out at anytime starting with July, but if he opts for only the 18,000 he must take out something in July to start the plan. If he is going to take the full annual amount of 36,000 he could take the entire amount in December if he wanted to because the pro rate factor would become immaterial.2008-06-23 20:17, By: Alan S., IP: [126.96.36.199]
L2: 72T withdrawal in midyearGood morning WAG:
Alan has given you the “roadmap” to follow to set up a good 72(t) plan after the initial, penalty withdrawal. But I want to focus on the “red flag” he raised about seeing even numbers for distribution amounts. As you said …
“Thank you for your information. The rounded numbers were figures given to me, I assume to simplify the question.”
72(t) is a tax issue, not a financial planning issue. No doubt there are many financial planners who can accurately set up 72(t) plans that are in compliance with IRS regs. However, for your own peace of mind and E&O coverage since you are the “tax professional,” you should use real numbers and the calcualtors on this site to determine distribution amounts for your client”s plan. And of course, DOCUMENT, DOCUMENT,DOCUMENT!I am a financial planner and am confident in my ability to set up a proper SEPP Plan. However, I always coordinate with either a CPA or EA and get their concurrence when setting upa newplan. This way everyone is covered.Good luck and I hopethis helps.Jim2008-06-24 06:46, By: Jim, IP: [188.8.131.52]