busting 72t

L1: busting 72tI am seriosly considering busting the plan I started in Jan/04 and recalculating yearly. Please correct me If I”m wrong. From what I”ve learned from this site I can bust the plan at any time in 07 by recalculating using my balance on the last day of Dec. 06 and drawing the appropriate amount before the end of this year. ( it will be more than what I”m currently drawing). The penalty will be for only three years.2007-07-22 07:12, By: cruiser, IP: [66.32.98.228]
L2: busting 72tHello cruiser:
You are essentially correct. You could permaturely terminate your existing SEPP plan effective 12/31/06 in which case you will owe the 10% penalty on all distributions taken in 2004, 2005 and 2006 plus appropriate interest.
Then, you could launch a new SEPP pan effective 1/1/07 (which could be a fixed plan or an annually recalculated plan) which does start a new 5 year period.
I would also recommend obsessive record-keeping of this situation and potentially an opinion letter from a professional in the event of an audit.
TheBadger
wjstecker@wispertel.net
2007-07-22 07:27, By: TheBadger, IP: [72.42.66.167]

L2: busting 72tYou might get some valuable input, and alternative solutions, if you provided details about your situation. There are many sharp practitioners who provide their insight for users consideration. 10% penalty on 3 years of distributions seems expensive, especially if there are less costly alternatives.2007-07-22 08:49, By: dlzallestaxes, IP: [151.197.173.111]

L2: busting 72tBill.
I may be missing something about the premature termination of this plan in 2006 when the actual modification is planned to take place in 2007. Obviously, this saves an entire year of penalty, and the largest year to boot since the expected modification will be an even larger distribution.
Can a taxpayer just elect to terminate their present plan by filing a 5329 for 2006 and paying the retroactive penalty, or alternatively since most custodians will probably code 2006 as “early” anyway, just elect to leave it that way and not file the 5329 while directly entering the penalty on Form 1040?
Sec 72t just refers to the year of modification and indicates the penalty includes the year of modification, and that”s why my thinking is that the only way he escapes a penalty for 2007 is if he can elect somehow to have made the modification back in 2006. If so, how does he do that?
2007-07-22 20:04, By: Alan S., IP: [24.116.66.98]

L2: busting 72tThis very situation came up in PLR 1999-09059. Taxpayer voluntarily ceased a SEPP plan; paid the the 10% surtax and commenced a new SEPP plan.
TheBadger
wjstecker@wispertel.net
2007-07-22 20:19, By: TheBadger, IP: [72.42.67.103]

L2: busting 72tI”m confused. I thought that you could only bust a plan by taking more or less than the annual distribution amount. I don”t see how you could retroactively bust the plan as of 12/31/06 by doing something in 2007. I didn”t think you could just say that you busted the plan, even though you didn”t do any action that busted it. Further, I thought that the 10% penalty was calculated based upon the accumulated distributions, so that any distributions in 2007 would be included in the penalty, unless -0- was distributed in 2007 because you were on an annual distribution single payment later in the year.2007-07-22 21:30, By: dlzallestaxes, IP: [4.175.9.194]

L2: busting 72tLooks like I opened up a can of worms. Here”s more detail. I started my 72t plan in Jan/04 with Merril Lynch and was told by them that I could not recalculate yearly. Once the plan was setup that was it until age 59.5. In Nov/05 my CPA sent a letter to the IRS asking for yearly recalculating permission. Request was denied in Aug/06. From this site I have since learned that recalc is permitted if done from the very start. If I start over I will draw approx. 20k more a year with current interest numbers. If penalty is only for 3 years I will probably recalc. If penalty includes 07 I may not do it.2007-07-23 08:31, By: cruiser, IP: [66.32.98.228]

L2: busting 72tYou left out a critical fact — your birth date/age. You might be near the “later of 5 years or 59 1/2″ threshold, and it might make more sense to get to Jan 2009 if you will be at least 59 1/2 by then. If so, you could then take unlimited distributions from then on. How much were your distributions for 2004,5, and 6 ? How much so far in 2007 ? (We can calculate the 10% penalty on the accumulated distributions.) The most important question — Do you NEED more money, or is it just the fact that you could take more money ? Is the penalty worth the increase, taking into account the probable 25% tax haircut on the distributions as taxable income ? You really have to do, or have your CPA do, a detailed analysis and calculation of the ramifications of your alternative approaches.2007-07-23 10:28, By: dlzallestaxes, IP: [141.151.13.5]

L2: busting 72tCruiser …
One very important point to remember -recalculation could result in the distribution going down, just like it can go up.
You mentioned that you may have opened a can of worms – not really, I gess that no one really believes that paying $40k to 70k in penalties to get a ”possible” 20k increase per year. I”m just guess at the numbers since you haven”t posed all the facts – the current distribution amount must be substantial if you can get a $20k increase.
You could probably borrow funds to have the additional $20k/year and pay less ininterest than the combined penalty and interest due on past due taxes for the 3 years of distributions.
2007-07-23 10:46, By: Gfw, IP: [74.136.109.63]

L2: busting 72tThis is my first series of postings on this sight and every time one of you guys posts a comment I learn something new. Thanks for taking the time. I don”t purposely leave out pertinent information. It”s just that the facts are clear in my mind and I forget that you guys aren”t mind readers. Birthdate is 12/15/53. My yearly take is 58,385. So far this year I”ve taken 34,057. By my calculations I”ve got 6 more years to go on this plan. I don”t really need it. It”s just that my parents could benefit more from my generosity now while they”re still on this earth.2007-07-23 13:13, By: cruiser, IP: [66.32.98.228]

L2: busting 72tNo need to apologize. We understand that most users of this site are first time, and often only time, users. Not many will need to come back again in the future. According to my calculations, you have withdrawn $ 209,212 to date ( 3 years @ $ 58,385 = $ 175,155 $ 34,057 in 2007). The 10% penalty is $ 20,921. Let”s assume that the total interest and penalties adds another similar amount, resulting in a total COST to you of $ 41,142. You are correct that you have about 6 years left until you will be 59 1/2 (on 6/15/2013). Let”s assume that you could increase your withdrawals by $ 10,000 per year. That would cost you another $ 2,500 to $ 3,500 per year in federal income taxesdepending upon your tax bracket (or $ 15,000 to $ 21,000 in total). It is great that you are in a position to help your parents, but have you considered other, less costly approaches. For example, refinancing your home, home equity line of credit, margin loans against your non-retirement investments all provide TAX FREE cash to give to your parents, and the interest you pay is DEDUCTIBLE. Then you could repay these loans in 6 years after you are 59 1/2. Believe it or not, even credit cards might be less expensive !!!2007-07-23 17:00, By: dlzallestaxes, IP: [141.151.13.5]

L2: busting 72tJust reviewed PLR 199909059 and as Bill indicated, the IRS allowed applicant to start a new 72t plan for 1998 and although the main issue was not the modification year, the 1997 CY was the last year subjected to early withdrawal. Therefore, the IRS essentially defined the modification date as the last date of the prior year to starting a new plan. Seems strange since the year of modification was actually 1998. Obviously, if they did not start a new plan and under 59.5, the year of actual modification would be subject to the penalty notwithstanding.
So my question is, for Bill and Gfw, can this PLR be relied on for those that do not request a PLR, and does it apply to an inadvertant bust such that the 5329 that reports the penalty is filed on the prior year”s 1040?2007-07-24 17:57, By: Alan S., IP: [24.116.66.98]

L2: busting 72tI think we can rely upon this PLR although it is the only one of its kind to tthe best of my knowledge. I think the wat to think through or interpret this PLR is to consider 1998 as having a zero distribution for the then existing SEPP plan thus causing the modification and application of the 10% surtax to 1997 and all years prior. Then, in the blink of an eye, a new plan is launched such that the real 1998 distribution is protected from the 10% surtax under the new SEPP plan. To do otherwise would then suggest that there really would need to bea one year gap between termination of an existing plan and commencement of a new plan.
TheBadger
wjstecker@wispertel.net
2007-07-24 19:32, By: TheBadger, IP: [72.42.67.77]

L2: busting 72tA question that I see from this thread: If there is a bust back to 2004, can there be amended tax returns filed for prior yearsthatwould result inreductiionsto the10% penalties based onexceptions to the penalty in prior years?
Thanks, Bob2007-07-25 22:51, By: car-tows, IP: [71.173.104.55]

L2: busting 72tI think you can, but you should attach all documentation to the amended tax return. Expect scrutiny by the IRS, and it will probably take a while. What exceptions do you think you had in prior years that you did not avail yourself of ?2007-07-26 16:32, By: dlzallestaxes, IP: [141.152.248.77]

L2: busting 72tdlzallestaxes, thanks for youranswer. My question was a hypothetical one, which I thought would assist “Cruiser” and anyone who may have bustedor will bust their72Tin the future.2007-07-27 01:05, By: car-tows, IP: [71.173.104.55]

L2: busting 72tIt appears that if the IRS is willing to accept the modification year as the year prior to the year the payout actually changed, the prior 72t plan must be replaced with a valid new plan. And if you have a valid new plan, the year following the inception of that plan plus later years would have to conform to the new plan requirements. If not, then a second busted plan will result.
Therefore, before anyone considers amending a return for an open tax year to back out the penalty on the actual year the plan changed, they should be sure that they have not busted the new plan and actually have a valid new plan. Otherwise, they will owe the early withdrawal penalty for that year anyway, and nothing would be gained.
But if they have a new plan that remains valid, it”s possible an amended return could eliminate penalty on the year the plan changed, if they cite the PLR and already paid that penalty. 2007-07-27 18:02, By: Alan S., IP: [24.116.66.98]