Busting a Plan
L1: Busting a PlanI have been taking withdrawals for almost two years, and am planning on busting my plan late this year. I am busting the plan to take a large one time payment, and will then restart an SEPP. (I am retired at 43, and have over $6M in my account, up from under $4M when I started.)
I know that I will owe 10% (roughly $25k)plus interest on everything that I have already taken. Can someone give me guidance on:
(1) How to report that penalty … what forms, etc?
(2) When to report what is needed in (1)?
(3) How to calculate the interest that I will owe?
Am trying to figure all of this out to determine exactly how much to withdraw. Would like to get it all paid as soon as possible, to minimize the interest cost.
Thanks for any help you can provide!2012-08-19 06:28, By: ISU Clones, IP: [22.214.171.124]
L2: Busting a PlanISU, I won’t try to answer the question you asked, but I would recommend that before you start another SEPP plan, you split your IRA so there is a second one that is not part of your next SEPP calc. Then, you would avoid busting the SEPP and paying an extra $25k in penalties, as is about to happen here, since any emergencywithdrawal could be taken from Non-SEPP IRA, and not affect your SEPP plan. The penalty would only apply to the emergency withdrawal.2012-08-19 15:57, By: Ken, IP: [126.96.36.199]
L3: Busting a PlanRemember to include the federal (and state and local) income taxes that you will owe on this one-time lump sum withdrawal.
If there are any state and local taxes due, you might need to do some tax planning for 2012 to determine if you will be subject to the Alternative Minimum Tax, which will affect whether you pay you state and local 4Q estimates in Dec or January.
As far as your questions, the penalty will be reported on your 2012 federal 1040 on line 58. Since no waiver exclusion is applicable, then form 5329 is not prepared/filed, and write “NO” to the left of line 58 to indicate that form 5329 will not be filed. Your computer software should do this automatically, in addition to doing the calculation of the penalty, and interest, assuming you or your tax practitioner enter the information properly in the tax program.2012-08-19 18:00, By: dlzallestaxes, IP: [188.8.131.52]
L4: Busting a PlanTax software has come a long way if it can capture the retroactive penalty and interest due for a busted plan. In any event Pub 590, p 50 still indicates that a Form 5329 is required to report a busted SEPP along with an explanatory statement since the penalty will apply to an amount unrelated to the current year distributions unless you busted in the year you started. The amount you show on line 4 of Form 5329 will also go on line 58 of Form 1040.
Since the IRS has yet to clarify exactly how they calculate the interest charge, if your software does not make a reasonable calculation (it would have to know the amount and month of each distribution from the start), forget the interest and let the IRS bill you for it.
If you want to start another plan, it is easier to wait until next January to avoid reporting complexity with the 5329, but if you have to, you can start another plan before then and just prepare to explain it to the IRS. You could include that explanation with the one already required with your 5329.
Finally, note that you may have another penalty exception other than the SEPP exception that could reduce your penalty. If so, you could amend prior year returns to change your 5329 coding (eg higher education, medical, etc) and you would need another 5329 for the current year if you have another exception for some of the current year distributions.
2012-08-20 04:13, By: Alan S, IP: [184.108.40.206]
L5: Busting a PlanIRS Pub 590 is inconsistent with form 5329 and the instructions for form 5329.
At the top of form 5329 it states ” If you ONLY owe the additional 10% tax on early distributions, you may be able to report this tax directly on form 1040, line 58 …. without filing form 5329. See instructions for form 1040, line 58.”
The instructions for form 5329, under “Who Must File” states (in the 2nd bullet) “However, if distribution code 1 is correctly shown in box 7 of ALL of your 1099-R forms, and you owe the additional tax on each form 1099-R, you do not have to file form 5329. Instead, see the instructions for form 1040, line 58…. for how to report the additional 10% tax directly on that line.”
IRS 1040 ISTRUCTIONS, page 42, states ” Exception. If you only received an early distribution from an IRA …and distribution code 1 is correctly shown in box 7 of form 1099-R, you do not have to file form 5329. Instead, multiply the taxable amount of the distribution by 10% and enter the result on line 58. The taxable amount of the distribution is the part of the distribution you reported on form 1040, line 15b or 10b, or on form 4972. Also, enter “NO” under the heading “Other Taxes” to the left of line 58 to indicate you do not have to file form 5329. But you must file form 5329 if distribution code 1 is incorrectly shown in box 7 of form 1099-R or you qualify for an exception.”
I agree with Alan that in all cases you should attach a schedule supporting your calculation.2012-08-20 15:39, By: dlzallestaxes, IP: [220.127.116.11]
L6: Busting a PlanIt’s probably not a big deal whether you file the 5329 or not as long as the explanatory statement is clear with respect to how the amount shown on line 58 was determined.
It is the second bullet point on the 5329 Inst where the recapture tax situation for prior years will result in Code 1 NOT showing correctly on ALL of the 1099R forms over the history of the 72t plan. The IRS still seems to think that some custodians provide exception 2 for 1099R forms for former years in which the taxpayer actually did take out the correct amount, but only a few of them do. Inaddition, therewill be no1099R at all if you simply stopped distributions when you were required to continue them. The IRS does not want amended returns for prior years but wants the entire recapture tax reported on the current return. Since only line 4 of the 5329 is to be completed, the form only serves as an alert to the IRS that they should look for an explanation to determine how you arrived at the amount on line 58.
It’s the explanation that is the real key, but like 72t plans in general, the IRS is not clear regarding exactly what they want in the explanation, and does not coordinate their advice in the Pub 590 with the 5329 Inst.2012-08-20 22:52, By: Alan S, IP: [18.104.22.168]