breaking 72T

L1: breaking 72TWhat/when determines if a SEPP 72T is broken?
Example – SEPP started in Feb 2006 at $1000/month.
How much do I need to take out by Feb 2008 in order to break the 72T? Or can I simply state that I want to break the 72T and pay penalties only on what I”ve already taken?Must I take more money before I can “break” it?
2008-01-25 07:43, By: Nancy, IP: [68.57.60.119]

L2: breaking 72TYou can voluntarily bust your plan at any point in time you wish. The PLR that serves as the basis for this is PLR 1999 09059. In that case the taxpayer adhered to the original plan for several years, but starting in a subsequent January wanted to take out more, so was allowed to start a new plan in January, and reported the prior plan busted as of 12/31 of the prior year. Of course, the new plan is totally independent and starts a new 5 year period .
I think it is cleaner to bust a plan on a calendar year as in that PLR, and simply attach the 5329 and pay the penalty on the tax return for the final year of the first 72t plan. You should be able to do this mid year as well, but the reporting is more complex because then you are splitting the current year between the two plans.
You can likely deem your prior plan busted as of 12/31/07. Doing your new calcs as if you were starting a new plan in January, you could incorporate the January payment into your 2008 annual amount and consider your January payment as the initial payment. You could then use either the Nov or Dec interest rate. If you did NOT take a January payment, and your initial payment is in Feb, then use cannot use the Nov rate. However, you could use the Dec rate and still take out a full annual amount for 2008 under your new plan even though your first payment was in February. In the first (stub) year, you can take out the pro rated amount or the full annual, your choice.
The bottom line is that you will not have to pay a penalty on any part of your 2008 distributions if you document this correctly. You can end the prior plan with a 5329 on your 2007 tax return. The IRS will calculate the interest due and bill you for it, so you only need to pay the “x” years of 10% penalty with the 2007 return.
The flexibility of the conclusion in the PLR is that a plan is busted when you deem it busted, as opposed to some formula when you are deemed to have violated the prior plan. By deeming your plan busted as of 12/31, you actually avoid the penalty for 2008 which is the year that you first physically deviated from your initial plan. This may not be all that logical, but it is what the IRS came up with in the PLR.
2008-01-25 13:30, By: Alan S., IP: [24.116.165.60]