L1: 72(T) WithdrawalsWe have just recently retired and are in the process of starting our 72(T). With what money we have our maximum that is calculated to receive is about $18,000 a year. We were wanting to receive $36,000/year. Merrill Lynch told us that we could receive this but that we would have to self report by filing a Form 5329. We can”t find any information on self reporting and not sure if we would be subject to penalties for over withdrawing. Also if we are subject to penalties, is it just for the extra $18,000 or for the full amount. We are kind of confused on this. They keep telling us to contact a CPA. Any information would be helpful.2008-08-06 06:48, By: dta, IP: [220.127.116.11]
L2: 72(T) WithdrawalsYou should definitely retain a tax or financial planning professional who is experienced in RETIREMENT planningand SEPP 72-T plans.
I am a CPA, and having lectured to fellow practitioners, I know that 90% or more of the CPAs do not have a clue about SEPP 72-T regulations.
You did not indicate the ages of yourself and your spouse. If one or both of you are over 59 1/2, then a SEPP 72-T is probably not necessary for you. If one of you will be 55 by 12/31/2008, and have a 401-K plan that you have not rolled over to an IRA, then you may be able to take withdrawals from that plan without being subject to the 10% penalty for early withdrawals. Also, you should indicate how much you have in each of your retirement accounts ( IRA, 401-K, etc.), and funds outside of your retirements.
If your employer(s) contributed company stock to the 401-K plan ( as their match) or to their pension/profit-sharing plan, then you may be able to save significant taxes under a special tax provision called “NUA” (NET UNREALIZED APPRECIATION).
If you NEED $ 36,000 per year, but the calculation only allows $ 18,000 per year, then you should NOT start a SEPP 72-T plan because you will be subject to RETROACTIVE 10% PENALTY on ALL distributions that you have taken cumulatively if you take more than the $ 18,000 allowable in any year prior to becoming 59 1/2 or 5 years, whichever is later.
If you “need” $ 36,000 primarily for the period thru 12/31/2009, and can get other funds (such as Social Security, home equity loans, etc.) to supplement this starting in 2010, then you can take $ 18,000 between now and 12/31/2008 in one or several paymenst, and then take another $ 18,000 in January 2009 as your only 2009 distribution.
In some cases it makes sense to use your non-retirement funds to get you to age 59 1/2, at which time you would no longer be subject to the 10% Penalty for Earaly Distributions.As you can see, this is a complex area. DO NOT TRY TO DO THIS YOURSELF.
You should consider all other alternatives, and only use a SEPP 72-T as a last resort. “Self-reporting” involves the preparation of a form 5329 which is used to report either the reason why you are not subject to the 10% Penalty for Early Withdrawals (of which SEPP 72-T is one of about 10 exclusions), or to report the calculation of the 10% penalty with your federal income tax return. If you withdraw more than the allowed limit, ALL of your withdrawals are subject to the 10% penalty, including those of $ 18,000 in all prior years.
2008-08-06 07:48, By: dlzallestaxes, IP: [18.104.22.168]
L2: 72(T) WithdrawalsMy husband is 56-1/2 years old and retired June 30th and no longer works for the company and rolled out a 278K from a 401K plan to a Traditional IRA with Merrill Lynch. They have indicated that if we want 36K under SEPP he will receive two (2) 1099”s (1 coded – not subject to penalty per SEPP (for 18K) and the other coded (for 18K) subject to penalty). Is what we are understanding only 18K subject to penalty and I choose to pay this penalty and do so each year no further action would be taken by the IRS?
I am 55, retired June 30th and have a 401K and has not been rolled out for approximately 58K but must do something with by October 1, 2008. We do realize if we take a distribution it will be subject to taxes but no penalty.2008-08-06 09:07, By: dta, IP: [22.214.171.124]
L2: 72(T) WithdrawalsYou may have misunderstood what they were telling you. If all the funds are part of the SEPP, then the 10% penalty is on the total distribution as you would immediately bust the SEPP by taking out more than the calculated annual distribution.
If you divide theIRA into at least two accounts and only use one to calculate the SEPP and make all excess withdrawals from the non-SEPPIRA, then only the excess withdrawals from the non-SEPP IRA would be subject to the penalty.
I also put $278k into the calculator at age 57 (57 if he will be age 57 before 12/31/2008)and develop an annual paymentof $16,997 – short of the $18k you mention and far short of the $36k that you want.
You should discuss with someone that is knowledgeable, but my guess is that unless you have funds in addition to the $278k, a SEPP plan will not work and you will be payingpenalties and taxes on all distributions.2008-08-06 09:27, By: Gfw, IP: [126.96.36.199]
L2: 72(T) WithdrawalsUnfortunately, you should have contacted a professional BEFORE your husband rolled over his 401-K to an IRA. If his firm”s plan allowed it, he could have taken periodic payments without any 10% penalty. He could have possibly taken the $ 36,000 now for what you needed initially, and additional amounts next year.
You should ask his firm if he can roll it back into his 401-K, and do this now. It”s possible, but highly unlikely.You should check with your firm to see if you have any NUA company stock in you plan. If so, you could probably benefit by taking a distribution of the stoick directly to a NON-RETIREMENT account, not into an IRA.If there is no NUA stock, then ask what their provisions are for withdrawals from their plan as a former employee. You should at least be able to take what you need for the balance of 2008 now, or before 12/31/2008, and the balance of your 401-K ( $ 58,000 total) in 2009, all without any 10% penalty. In your situation, you should not have a SEPP 72-T for your 401-K funds. Since you have not yet, hopefully, set up a SEPP 72-T for your husband, your own $ 58,000 should get you to the end of 2009. Even if there is a 10% penalty on the early distributions from your husband”s IRA in 2010, etc., you will only have that until he reaches 59 1/2, which is better that having to be locked in for 5 years until August 2013. By the way, the 10% is 10% of the amount withdrawn, in effect making the tax rate 35% rather than 25%, or 25% depending upon the taxable income on your tax return.2008-08-06 09:47, By: dlzallestaxes, IP: [188.8.131.52]