Breaking a 72T series of withdrawals

L1: Breaking a 72T series of withdrawalsI started a 72t series of monthly withdrawals from a qualified variable annutiyin August,05, at the age of 57. Due to unforseen circumstances, I now need to make a substantial withdrawal which I assume will break the equal withdrawals that I have been receiving on a monthly basis. After this substantial one-time withdrawal, I plan to go back to withdrawing the previously set up monthly withhdrawal. The question is will I be subject to any IRS penalties and if so how much??? Thanks! Tom2007-06-21 21:11, By: Tom, IP: [71.33.178.23]
L2: Breaking a 72T series of withdrawalsHello, Tom:
Yes, taking any amount that is different than the amount calculated when you set up your 72t plan constitutes busting the plan. The one exception to this is the 1-time change allowed for converting from the annuity or amortization calculations to the RMD method. Doing this reduces your payments so can be useful to those who are depleting their IRA faster than they want.
The penalty for busting a 72t plan is considerable. You must pay the 10% early withdrawal tax on all of the money taken to date. It is likely that the IRS will tack on some interest on this money as well. Thiscan be quitean expensive option.
If you started your 72t plan at age 57 and it is now almost 2 years later, you are approaching age 59.5 where the 10% penalty tax disappears. Is there any way, such as via a loan of some type, that you can delay taking additional money until after you have turned 59.5? Doing this will not eliminate the cost of busting your SEPP, since it runs for the longer of 5 years or until you are age 59.5,but it will eliminate the 10% penalty on the large amount that you want to take out.
Ed2007-06-21 22:46, By: Ed_B, IP: [67.170.159.37]

L2: Breaking a 72T series of withdrawalsYou should indicate what the “unforeseen circumstances” are, and any other retirement accounts that you have. There may be optional approaches that permit you to take “early distributions” without the 10% penalty on them, and avoiding the cumulative retroactive penalty on all of your SEPP 72-T distributions to date.
Also, if you have investments outside of retirement accounts, consider selling and paying 15% capital gains tax only on the GAINS, or converting these accounts to MARGIN accounts to borrow the funds you need TAX FREE!!2007-06-22 08:44, By: dlzallestaxes, IP: [141.151.17.181]

L2: Breaking a 72T series of withdrawalsThanks Ed for the info. Yes I am very much aware of the 59.5 year benchmark and plan to make the withdrawal a day later when I reach 59.5.. Tom2007-06-22 15:30, By: tom, IP: [71.33.178.23]

L2: Breaking a 72T series of withdrawalsHi, Tom:
I hope that I did not offen you with my reply. That was never my intent. It”s hard to know what others know when they ask a question, so I try to be as thorough as I can.
I hope that this all works out for you. Busting a SEPP plan is a very serious financial situation. I really hope that your circumstances do not force youto do that and that things can be worked out so that you don”t have to do it.
Ed2007-06-24 14:08, By: Ed_B, IP: [67.170.159.37]

L2: Breaking a 72T series of withdrawalsTom,
I just got through speaking with Fidelity regarding this situation. I posted a message myself because Fidelity told me that I could do it and pay taxes on what I have withdrawn (which one has to do anyway) plus a 10% penalty and taxes on money that I want to withdraw. They would then re-do the 72(t) by closing the old one out and then doing a new one. I have found many websites and done quite a bit of reading recently, you might want to do the same and ask your financial institution about this. I also found out that there are exceptions to being able to remove your money without penalty, such as becoming disabled. Also, there are special rules that came out I believe they said in August,2006 that makes exceptions for people classified as public service employees. That information was posted on the US Treasury website.
AW

2007-06-28 19:17, By: AW, IP: [75.117.54.173]

L2: Breaking a 72T series of withdrawalsEd – unless I”m missing some here, (I”m only on my first cup of coffee) you indicated that if he started his 72t at age 57 2 years ago, he doesn”t have far to go till 59 1/2 to avoid the 10 penalty.
The rule states 59 1/2 or 5 years WHICHEVER IS LONGER. Therefore, he has until August of 2010 to continue his 72t without penalty.
Tom, as stated by other posts, there are exceptions to the rules, however, very, very strick rules. Don”t know what your circumstances are, however, you might want to check with a CPA or the IRS to see if they apply to you. Good Luck.2007-06-29 05:27, By: Kim, IP: [24.172.244.211]

L2: Breaking a 72T series of withdrawalsI think Tom understands that if he no recourse but to bust the plan, but can make the modifying distribution after reaching 59.5, he will at least avoid the penalty on the the large distribution that busts the plan and all later distributions, but will owe the penalty and interest on 72t (actually q) distribution prior to 59.5. And since he will be over 59.5, there is no need to start up a new plan.
One problem with the VA is that these non periodic distributions are taxable until the earnings in the contract have been distributed, ie LIFO tax accounting vrs the pro rata rules for an IRA.
If the prior distributions have been monthly, and a much larger sum is needed now, note that the 72q is not yet officially busted should something happen to allow him to stop the monthly distributions to year end and keep to the total annual amount from exceeding the 72q amount. Changing the distribution pattern is not a bust. He could even use up to 60 days to roll back amounts in excess of the annual 72q amount and save the plan before it is officially busted. It”s good to keep your options open as long as you can just in case an unexpectedsolution presents itself.2007-06-29 19:57, By: Alan S., IP: [24.116.66.98]

L2: Breaking a 72T series of withdrawalsAlan:
As I read Tom”s original post, I understand that he is using a variable annuity to fund his “qualified” money. So if it”s a true “qualified plan” orjust an IRA, which typically gets thrown into the “qualified” category pot for discussions, then it”s a 72(t). Therefore, unless Tom has some “after-tax contributions” to his “qualified variable annuity,” then all distributions will be taxable and subject to 72(t) rules and not 72(q) rules.
I agree that busting early rather than later is best and cheaper, assuming busting is the only option. Given the “tightness of the rules” for other exceptions, unless Tom is “certified disabled” at this time, then he”s probably stuck with an early bust to get the needed funds, assuming no other sources are available.
Tom:
Don”t forget to checkthe VA contract for exceptions to the CDSC (penalty charges) for exceeding the “free withdrawal amount” if the extra amount you need will otherwise trigger this charge. There may be exceptions to this aspect that you will need to use.
Good luck.
Jim2007-07-02 07:08, By: Jim, IP: [24.252.195.14]