L1: Busted 72tCan’t believe this happened as we’d carefully planned our 72t strategy for many years…but we’ve encountered an unexpected opportunity to purchase some great property from a friend at a drastically reduced price. However, our only method of funding would be pulling significant funds from our IRA – which would bust our recently started SEPP.
The opportunity is good enough that taking the 10% early withdrawal penalty and one-year tax bracket hit next year makes sense, but I’m unsure how the “busting process” works. I’m hopeful it’s as simple as paying the 10% early withdrawal penalty on the SEPP funds already taken in 2012.
The details on the SEPP: The calcs were done by Fidelity, using our 2011 year end IRA balance. Our first monthly withdrawal of ~$600 was August of 2012. So, as of now – we’ve taken 5 distributions totalling around $3,000. My understanding is Fidelity will provide a 1099 next month showing “no known exception” for the 2012 withdrawals – which would have required us to useIRS Form 5329had we continued with the SEPP.
If we just cancel the monthly withdrawals effective immediately, will we simply need to pay the 10% penalty on the ~$3,000 withdrawn come tax time? Or is there more to it, either process-wise or penalties?2012-12-23 19:58, By: syspig, IP: [188.8.131.52]
L2: Busted 72tThe costs in your case are very small. All you need to do is report your IRA distributions for 2012 as if you never started a plan. You will not need a 5329 and p 2 of your Form 1040 will show a penalty of about $300 on the appropriate line.
After you take the penalized distribution next year, you might want to consider establishinga new 72t plan going forward. The obvious risk is that your IRA balance may be too low to generate a 72t distribution that is large enough for your needs.
2012-12-24 02:23, By: Alan S, IP: [184.108.40.206]