L1: Busted 72t?I’ve just discovered that my 72t is probably busted and I’m not aware of anything that can be done to correct the situation. But I’m hoping someone on this forum can give me advice as to how to proceed from here.
Here are the particulars.
Turned 59 1/2 on Nov 19, 2010.
Date of first distribution: October 20, 2008. Full distribution of $60,000.
Starting in Jan, 2009 I’ve taken monthly distributions of $5,000. On the 12th of each month.
I just received the 1099R from the custodian and for 2010 the distributed amount was $55,000. It appears the automatic monthly distributions stopped in Dec 2010 and Ididn’t notice it. I’ve contacted the custodian and based on the initial research it’s not clear why the automated distributions stopped.
The agent for the custodian said he would do a more extensive investigation to understand what happened and I asked him to get someone involved that understands 72t arrangements. He said he would and would get back to us within the next two days.
Do I have any options?
Bob2011-02-01 02:29, By: Bobmac, IP: [22.214.171.124]
L2: Busted 72t?Test2011-02-01 03:46, By: Alan S., IP: [126.96.36.199]
L3: Busted 72t?Bob,
Having trouble posting a link, so go to Articles of Interest and read the 5th one on the list on executory error letter rulings. You should get relief, but the custodian should pay the costs of $10,000 plus legal unless you contributed to the error. That is still less than $17,000 plus interest.2011-02-01 03:52, By: Alan S., IP: [188.8.131.52]
L4: Busted 72t?Alan, I’ve read the article you referenced and it’s encouraging. Knowing this information will help when I speak again with the custodian.
thanks2011-02-01 04:57, By: bobmac, IP: [184.108.40.206]
L4: Busted 72t?Before going to the expense of a “PLR (Private Letter Ruling)”, I would have your tax preparer try to get the “busting” waived thru the IRS’ PPS ( Practitioner Priority Service) or TAS ( Taxpayer Advocate Service). It’s worth a try.
From your description it appears that this was inadvertent by the custodian, and not caused by you. ( unless for some reason you had told them not to make the Dec payments automatically in case you were checking every Dec that the cumulative amounts paid thru 11/30 were correct, and then telling the custodian how much the Dec payment should be, in case there had been some error)2011-02-01 05:04, By: dlzallestaxes, IP: [220.127.116.11]
L5: Busted 72t?Contact your custodian and speak with a supervisor or someone in authority … not just the C/S rep who answers the phone. Propose the custodian distribute the December, 2010 amount and correct their records and give you a new Form 1099-R. The deadline for custodians to submit their Form 1099-R report to the IRS hasn’t occured yet and they have some leway to act, if they will take action quickly.
I had a custodian do this exact thing a couple of years ago when I could prove the error was on their part. All I had to do was point out the error to the custodian and they took care of making the cocrrections without me having to suggest this action.
PS to Alan: I just had trouble saving my post also. Then I discovered that I hadn’t answered the math quiz. This is called “Operator Error.”2011-02-01 15:42, By: Jim, IP: [18.104.22.168]
L6: Busted 72t?Part of the problem that Alan was having relates to the posting of a hyperlink which because of some past problems, I deleted the ability to post links. Later today, I will give certain posters (people who help maintain the forum) the ability to post links.2011-02-01 15:50, By: Gfw, IP: [22.214.171.124]
L7: Busted 72t?Dlz and Jim, appreciate your advice. Unfortunately I do my own taxes so I guess those paths aren’t available to me.
I will contact the custodian as Jim suggests and seek a correction on their side.
Thanks for the advice.2011-02-01 16:05, By: bobmac, IP: [126.96.36.199]
L7: Busted 72t?Gordon:
Thanks for the info about Alan’s true problem. I didn’t think he would fall victim tomy “dummy mistake” of forgetting to answer the math question first.
Jim2011-02-01 16:09, By: Jim, IP: [188.8.131.52]
L8: Busted 72t?Try Jim’s fix first – by far the easiest, most direct and trouble free. If you get a corrected 1099R you are almost home free.
But if they do this clarify how 2011 will be handled. If they distribute 13 months this year and assign one of them to 2010, they need to note the reduced distribution for 2011 so the problem does not repeat itself next year.
Glad to know about the link. I tried to post it 3 times and everything disappeared, not just the link, so eventually figured it must be linked to the link 🙂
2011-02-01 18:44, By: Alan S., IP: [184.108.40.206]
L9: Busted 72t?If the custodian does like I hope, here’s what should happen:
1. Create a distribution forwhat should have been the correct, December, 2010, amount and send you a check.
2. Issue a “Trade Cofirmation” forthe December, 2010,distribution.
3. Issue a corrected End-of-the-year Account Statement for 2010, which will reflect a distribution oneither the normal distribution date in December or 12-31-2010.
4. Issue you a new … not necessarily marked as “CORRECTED” …Form 1099-R for the correct 72(t) annual amount.
This may work and then it may not work; it just depends on the IRA Custodian and how willing they are to work with you. If you can clearly show that the error was made by the custodian, they may be more willing to work with you.
In my case I was working with a variable annuity company (which shall remain nameless) and it dealt with a partial RMD for a client in her 80’s. The VA company had all of the documentation but failed to properly calculate the correct amount. It was early February when we caught the error and made the correction. They told me that since the deadline for them to file their Form 1099-R reportwith the IRS was still in the future, they had the lattitude to make the necessary distribution and corrections. All went well and my client died some years later and never heard from the IRS.
Jim2011-02-01 20:20, By: Jim, IP: [220.127.116.11]
L10: Busted 72t?Jim, I very much appreciate you following up and providing a detailed guideline for what may/should happen.
As you suggested, I contacted the custodian again and this time spoke with a supervisor. He understood theprospect of a busted 72t was more important than just trying to determine why automatic distributions had stopped.
Igave him your proposal as a possible solution and he promised to get back to me within 24 hours. He seemed knowledgable regarding 72t and the cost of busting this plan. So I believe there is a higher degree of urgencynow on their part.
Thanks for the good advice.
Bob2011-02-01 21:56, By: bobmac, IP: [18.104.22.168]
L11: Busted 72t?I hope that the custodian works things out.
If not, you can hire a qualified tax practitioner who can try the PPS and TAS routes for far less than a PLR, even though you prepared your own taxes.2011-02-02 01:20, By: dlzallestaxes, IP: [22.214.171.124]
L12: Busted 72t?Here’s an update on my “Busted 72t” post. I spoke with a manager from the custodian today and here’s what he had to say.
1. It was their fault that the December automatic distribution didn’t happen. Its thought that the system stopped the automatic function after I turned 59 1/2 on Nov 19, 2010, hence no Dec distribution.
2. They are unable to do a year-end adjustment, distributing $5k for 2010 and creating a new 1099R, as Jim suggested.
3. They will send me a letter recognizing the problem as their fault and recommend that I submit the letter along with a 5329 form when I do my taxes, and request that the IRS waive the penalty.
4. If the IRS refuses to waive the penalty the custodian will pay the penalty and interest due.
This letter approach is the way the custodian handles problems with RMDs that they have caused IRA holders. And normally the IRS accepts the letter and waives the penalty.
I suggested that this approach may not work for 72t’s and that based on what I know (all from this expert forum) a PLR may be required.
The manager I spoke with was very knowledgable about IRAs and 72t plans but didn’t consider himself a 72t expert. So he will; 1) ask his 72t experts if the letter approach is ok or should they proceed with a PLR, and 2) how do I restart the 72t so the IRS will understand I intend to continue the plan.
I expect to hear from the manager tomorrow.
Overall, I’m very pleased withthe custodian for accepting full responsibility. Anyone see any flaws in his recommendation?thanks2011-02-02 23:20, By: bobmac, IP: [126.96.36.199]
L13: Busted 72t?GET A LETTER FROM HIM NOW ACCEPTING RESPONSIBILITY. HE MIGHT NOT BE THERE IN A WEEK OR MORE IN THE FUTURE, AND THE NEXT PERSON MIGHT DRAG HIS FEET, AND DENY RESPONSIBILITY.
THEN they, with an IRS POA form, or you alone, or with both of you on the phone together, can try calling IRSTAXPAYER ADVOCATE SERVICE. Expalin the situation, and see if they can waive any penalties, and allow the SEPP 72-T to continue or be reinstated.2011-02-03 01:20, By: dlzallestaxes, IP: [188.8.131.52]
L14: Busted 72t?An other issue with my busted 72t is how to properly restart the plan in 2011. My yearly amount is $60,000. In 2010 only $55,000 was distributed due to custodian error. I’m going to assume the IRS accepts the custodians letter and waives the penalty.
How do I show the IRS that I plan to continue the 72t? Do I distribute $60,000 in 2011, or $65,000 to make up for the missed distribution in Dec 2010? And if I do $65,000 in 2011 won’t that just bust the plan again?
Any advice on how to continue the plan?2011-02-03 15:48, By: bobmac, IP: [184.108.40.206]
L15: Busted 72t?Hopefully when you work things out with the IRS they will somehow note your account, but I would not count on it.
I would withdraw the $ 5,000 ASAP, if you haven’t already. That is your evidence that they/you attempted to rectify the error ASAP.
Then, during 2011 withdraw your usual $ 60,000.
Unless you are audited, IRS never keeps track of anyone’s annual SEPP distribution amount as far as I know. Ironically, if you never told them of your underwithdrawal for 201, they would probably never knbow, unless you were audited for some other reason. But, I understand the “sleep factor”, and your wanting to get it resolved properly now.2011-02-03 17:44, By: dlzallestaxes, IP: [220.127.116.11]