Busting plan in last year…
L1: Busting plan in last year…I have a question regarding an existing SEPP. DOB is 8/18/57. Took first distribution in 2012 and anticipated final distribution this year. However, need to bust the plan and NOT take the distribution this year.
If I do so and the custodian can’t stop the distribution (mid-October), can I just redeposit it? Then, just report that it was busted in my 2017 tax return and repay the 10% penalties for all earlier distributions?
Also, I haven’t yet filed taxes for 2016 (for other reasons, unrelated to the SEPP)–if I plan to bust the SEPP this year, can I just pre-emptively pay the penalty for 2016 with the tax return I submit in October? The custodian marks the box where I have to manually explain the SEPP in my tax return, so it is not marked as a SEPP distribution. So, I could just NOT take the exception and pay the 10% penalty now since I know–will that be too confusing?
Thanks for the help!
2017-09-25 01:12, By: Baxter, IP: [22.214.171.124]
L2: Busting plan in last year…Why do you have to bust the plan ?
Don’t any of the other exceptions apply so you can withdraw money without busting the plan ?
Can’t you take a home equity loan or do something less expensive than busting the plan ?2017-09-25 01:28, By: dlzallestaxes, IP: [126.96.36.199]
L3: Busting plan in last year…Looks like he does NOT want to take a distribution this year.2017-09-25 02:08, By: NotSoOld, IP: [188.8.131.52]
L4: Busting plan in last year…My mistake.
How much is the distribution and the tax on the distribution, vs the 10% penalty ?
Will you want to take any distributions before you reach 59 1/2, or are you ok not taking any distributions until after you are 59 1/2 ? In other words, has your financial situation changed for the better ? If so, and you are working, you could use the distribution to maximize your 401-K and/or IRA contributions for 2017 to offset the taxability of the SEPP 72-T distribution, and avoid the 10% penalty retroactively on the distributions for the last 4 years. You could also use the 2017 distribution to prepay the 2018 real estate taxes, pay 2017 4Q state estimates, and mortgage payments due for Jan 2018, and other deductions. Talk with your tax practitioner for doing year-end tax planning between now and 12/31 if you took the distribution, in order to avoid the 10% penalty.2017-09-25 14:37, By: dlzallestaxes, IP: [184.108.40.206]
L5: Busting plan in last year…The distribution is modest and after evaluating/maximizing various options to offset taxability, busting the SEPP appears to be a serious option. Will discuss all options further to see if ultimately makes sense.
If so and the distribution can’t be stopped, if I just put it/roll it back within 60 days, will that effectively be considered “busting” the SEPP?
And, given the extension for filing 2016 taxes, is it recommended to just pay the 10% penalty and note that in 2017 taxes to avoid any additional interest on that year’s penalty?
2017-09-25 15:28, By: Baxter, IP: [220.127.116.11]
L6: Busting plan in last year…You are not allowed to make ANY contributions to a SEPP 72-T once it is set up. Therefore, you cannot re-deposit the 2017 distribution. That would bust the plan the same as not taking the distribution. In addition, there would be a penalty for “excess contribution”, so the re-deposit is not a viable option.
Usually the penalty is paid with the tax return for the year in which the busting takes place. That would be for 2017 when you do not take the distribution. Since you took the distribution in 2016, I doubt that you could claim to have not taken it or busted the plan in 2016 because the 1099-R form filed already with the IRS would be proof otherwise. The cost to fight the IRS or try to convince them that you busted the plan in 2016 might exceed the 10% penalty.
If you gave us some figures and reasons, we might be in a better position to advise you, rather than a general discussion.2017-09-25 16:00, By: dlzallestaxes, IP: [18.104.22.168]
L7: Busting plan in last year…The distributions are modest, total, not including 2017, is under $35K. My reason is that I prefer to stay within a certain bracket due to some other unexpected income.
If I decide to bust the plan, I will request that the distribution is not made, effectively busting it. My question about re-depositing it is ONLY if they can’t stop the distribution for any reason.
I understand that by re-depositing, it will effectively bust the plan too. However, am I understanding correctly that if they can’t stop the distribution and I re-deposit it, it’s also considered a contribution, not just failing to take the final distribution?
As for 2016, I don’t want to claim that I didn’t take a distribution. Also, I didn’t bust the plan in 2016, I’m busting it in 2017. What I’m asking is, if I decide to bust it in 2017 and know I will owe the penalty for 2016, can I just pay it when I file my 2016 taxes in October (on extension) to cut off interest penalties (at least for 2016) or is it just cleaner to file the 2016 taxes as if it’s a SEPP distribution and then pay the penalty when I file 2017 taxes? Net – I guess since I may already know I’m busting it, I feel like I should just go ahead and pay the penalty sooner than later…..but, not if it will confuse the IRS in the end.
2017-09-25 16:24, By: Baxter, IP: [22.214.171.124]
L8: Busting plan in last year…The penalty is related to the year the plan is busted. Otherwise you would have to file amended tax returns for all prior years, which you cannot do. You cannot selectively isolate 2016. If you try what you are suggesting, you will definitely be involved in correspondence with the IRS which could cost more than the $ 3,500 penalty.
If your “unexpected income” was capital gains, they are only taxed at 15% (or 20% in high tax brackets). If you got a bonus, new job, or other wage income, then why not maximize your 401-K plus a $ 6,500 IRA ? If you explain your type of income, or why you would be in a higher tax bracket, we might have some ideas.2017-09-25 16:36, By: dlzallestaxes, IP: [126.96.36.199]
L9: Busting plan in last year…So, the “unexpected income” is a settlement and I have been considering every opportunity to offset taxable income including maxing out IRAs, 401ks, etc. and am open to all ideas.
First, I don’t understand what you mean re: “Otherwise you would have to file amended tax returns for all prior years, which you cannot do.” Could you please explain?
Second, to avoid unnecessary confusion, is it suggested to just report the SEPP distribution for 2016 and then pay the penalty with 2017 taxes IF busting the SEPP is the best option?
Third, is it really considered “contributing” to the SEPP if I re-deposit the 2017 distribution within 60 days? I was under the impression it was like it was never distributed. Wrong?
2017-09-25 18:05, By: Baxter, IP: [188.8.131.52]
L10: Busting plan in last year…If you reported on your 2016 tax return, and paid the 10% penalty with it, it would be analogous to your amending all prior returns to report the 10% penalty for each of those years as well, as if you busted in those years accordingly. I was just making a side comment as to why you could not pay the 10% penalty with the 2016 tax return, nor cumulatively for all prior years either with the 2016 tax return in order to stop the interest.
The tax law requires the 10% penalty to be paid for the year in which the plan is busted.
2nd — YES
3rd — YES, WRONG. Distributions are distributions. Contributions are contributions. This is not the same as “rollover” situations within 60 days.
4th — You would be looking at a lot of IRS correspondence if you decide to “go it alone”, counter to the advice you have been given. We think you should follow your tax advisor’s advice.2017-09-25 19:20, By: dlzallestaxes, IP: [184.108.40.206]
L11: Busting plan in last year…Appreciate the clarifications.
Regarding redepositing — if I treat the 2017 distribution like a “regular” distribution (where the 60-day rollover rule typically applies) rather than like a mandatory SEPP/MRD distribution (where the rule does not apply) by rolling it over and redepositing back into the IRA within 60 days, doesn’t that action effectively “bust” the SEPP because I didn’t take the mandatory distribution? If so, why is it also considered a contribution to a SEPP since there technically isn’t one because it was busted as soon as I put it back and didn’t treat/take it as a SEPP distribution?
2017-09-25 21:35, By: Baxter, IP: [220.127.116.11]
L8: Busting plan in last year…Baxter, your statement… “and know I will owe the penalty for 2016”.
Just to clarify…you will owe the penalty on all distributions from 2012 through 2016, not just 2016.2017-09-25 17:54, By: Gfw, IP: [18.104.22.168]
L9: Busting plan in last year…Gfw, yes, I completely understand that by busting the SEPP in this final year, I will owe penalties for all previous distributions. Since I know that and haven’t yet filed taxes for 2016 (I will do that mid-October), I was thinking to pre-emptively handle it rather than keep accruing interest on the penalty. BUT, it sounds like it will just make things worse, correct?
And, to clarify further – is it correct that I won’t owe penalty on the 2017 distribution (would’ve been the final one) for two reasons: 1) I won’t take the distribution and 2) I’m over 59.5?
2017-09-25 18:20, By: Baxter, IP: [22.214.171.124]
L10: Busting plan in last year…I would file file the bust with your 2017 taxes as that is the year when the plan was busted, not 2016.
If you don’t take the distribution, there will be no penalty on missing the distribution.2017-09-25 18:39, By: Gfw, IP: [126.96.36.199]
L11: Busting plan in last year…Got it, I will plan on filing and paying the penalties in 2017 if I indeed bust the SEPP.
Regarding the distribution date – I take mine once a year and usually mid-October. Is there any rule that prevents me from moving this date out to December to allow a bit more time to see if I can offset enough to take the distribution and not bust the SEPP?
I started taking distributions in Oct 2012 and am subject to the the 5-year rule. Do I have to take the final distribution by Oct 2017 or just by the end of 2017?
Thank you2017-09-25 22:08, By: Baxter, IP: [188.8.131.52]
L12: Busting plan in last year…Good chance that the plan is not busted. Your modification date is 5 years from the date of your first 2012 distribution, sometime next month. How much did you distribute in 2012? If you took out a full annual amount in 2012, you should not take ANY distribution in 2017. You can stop a distribution anytime you wish, just contact the custodian and make it clear that you do not want anything distributed.
There are still a few variables here. We need to know how many months worth you took out in 2012, and how much you have already taken out in 2017.
Note that IF you took out 3 months of distributions in 2012, then you need to take out 9 months worth of distributions this year PRIOR to the plan modification date.
2017-09-26 03:18, By: Alan S, IP: [184.108.40.206]
L13: Busting plan in last year…Alan — Good catch. I think he said he takes annual distributions every October. His 5 annual distributions would have been in October 2012, 2013,2014, 2015, and 2016. His 5-year period ends Oct. 2017, but since he will be 59 1/2, he doesn’t have to take any distribution in 2017. If he wants to, he can take any amount after the 5-year anniversary date or no distribution in 2017, or future years until the RMD at 70 1/2.
I think we all got caught up in his wording that he had to bust his plan, without any of us recalculating the 5-year period.2017-09-26 05:05, By: dlzallestaxes, IP: [220.127.116.11]
L14: Busting plan in last year…Alan, wow, this is unexpected news. I understood I had to take the 2017 distribution since it’s the end of the 5-year period.
dlzallestaxes is correct, I take annual distributions every October and have taken then each year since 2012 thru 2016.
So, because I’m 59.5, I don’t have to take the distribution this October after all even if it’s the end of the 5-year period? Was the 2016 distribution considered my LAST required distribution?
If so, I’m definitely requesting that there’s no distribution made in October. However, if they make the distribution — does that mean I can actually roll it back/redeposit without any penalty since it’s not technically a required SEPP distribution?
Thank you for all the help!
2017-09-26 17:25, By: Baxter, IP: [18.104.22.168]
L15: Busting plan in last year…Yes, since you have a 5 year plan you should only take out 60 months worth of distributions during the plan term and you have already done that.
I don’t think the IRS would bust the plan if you happened to take an annual distribution in 2017, but I think gfw thinks they could based on the Arnold v Commissioner case. Either way, since this distribution would NOT be a required SEPP distribution you could roll it back within 60 days as long as you have not used up your one rollover permitted over the last 12 months. That said, it would be highly preferable if you could stop that distribution from occurring rather than doing a rollover which might attract negative IRS attention.
After the 5 year SEPP period is over, you can take out any amount you want or nothing.2017-09-26 18:25, By: Alan S, IP: [22.214.171.124]
L16: Busting plan in last year…Ok, so the 60 months/5-year clock starts ticking the day of the 1st distribution and this 6th 2017 distribution is AFTER that 60 months is over (correct me if wrong).
Regarding your comment about gfw/Arnold vs. Commissioner – I don’t see any reference to that in the discussion above? What is the concern?2017-09-27 18:47, By: Baxter, IP: [126.96.36.199]
L17: Busting plan in last year…Hi again – following up on my query about gfw/Arnold vs. Commissioner from last week. What is the concern that taking this 6th distribution would be considered busting the plan?
Also, by asking them to cancel this 6th distribution — is it considered a modification BEFORE the 5-year modification date or not because the 60 months of distributions are already complete as of the 5th distribution in Oct 2016?
Appreciate the continued clarifications!2017-10-04 18:52, By: Baxter, IP: [188.8.131.52]
L18: Busting plan in last year…Without re-reading all the details… in a 5 year plan, take no more than the 5 annual distributions. After the end (typically from the 1st distribution date add 365 days x 5 + 2 additional days for safety) and being over age 59.5 at that point, you can take as much or as little as you desire. 2017-10-04 19:12, By: Gfw, IP: [184.108.40.206]
L19: Busting plan in last year…To explain further, after the later of 60 months after the initial distribution or age 59 1/2, THE PLAN ENDS !!!!
After that you can take -0- or 100% of the balance, or anything in between.2017-10-04 21:10, By: dlzallestaxes, IP: [220.127.116.11]
L19: Busting plan in last year…Thank you both for the clarification…..SO….
In speaking with the custodian, they’re advising “conservatively” I should take the 6th distribution on October 18th even if I’ve met the requirements (5 annual distributions and 59.5).
I’m confused because the 18th is my annual distribution date and using the 5-year modification calculator on this site (or adding the 2 days safety per gfw), the 5-year modification date isn’t till October 19th or 20th. Technically, if I take this distribution, wouldn’t I be taking MORE than I should in the 60 months (and perhaps busting the plan)?
Further confusing the matter is this below on the IRS website–they don’t appear to factor in “the day after” the 5-year period…why?
When do I fulfill my obligation to take substantially equal periodic payments?
The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 _. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.
2017-10-05 16:39, By: Baxter, IP: [18.104.22.168]
L20: Busting plan in last year…Oh, one more add regarding the IRS site above: They state, “…you may not take a different distribution or alter the amount of payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.”
Is NOT taking a distribution considered taking a “different” or “altered amount of payment”?
That said, given the IRS doesn’t factor in the extra day or 2 AFTER the 5 years on their site, then, I suppose if I don’t take the distribution on the 18th–which COULD be considered a different or altered payment–it would be OK, right?2017-10-05 16:45, By: Baxter, IP: [22.214.171.124]
L21: Busting plan in last year…The custodian is giving you bad advice. You should not take a 2017 distribution because you have already satisfied the 60 months of distributions for the 5 year plan. The custodian is apparently not aware of this or how a 5 year plan differs from an age 59.5 plan. There is more risk of a busted plan if you take the distribution than if you do not take it because of Arnold v Commissioner. Further, if you did have to take a 72t 2017 distribution, you would not do it on 10/18. You would do it well before 10/18 so there would be no doubt of it being distributed prior to the plan modification date.
This website suggests adding a day or two to the actual deadline as a margin of error in case someone at the IRS factors in leap years. The IRS apparently sees no need for a margin of error. If you need money this year, then take a distribution of whatever amount you need after 10/25 so no one will possibly consider the distribution to have occurred before the plan modification date. 72t plan modification dates are determined from distribution dates which you may not even know for sure, not received dates which you do know.
I do not think you wanted to take a 72t distribution in 2017 anyway, so following our advice is consistent with that.2017-10-06 00:12, By: Alan S, IP: [126.96.36.199]
L22: Busting plan in last year…Yes, it does seem like they are giving incorrect advice since I’ve already taken 60 months of distributions (albeit in 5 annual distributions).
The person I last spoke with at the custodian adamantly emphasized that they were a “Certified Financial Planner” and knew all about a 72t, yet, he kept repeating it was his opinion that a distribution was necessary this year because I turned 59.5 in 2017. I reiterated it’s either 59.5 OR a 5-year rule, not both and he kept repeating the fact I turned 59.5 required a distribution!
You’re correct that I did not want to take the distribution, so, I’m definitely working to stop it despite their obvious concern I’m making a mistake. Ironically, it seems if I did take the scheduled distribution, per their advice, given the ambiguity of what the distribution date actually is – I’d be rolling the dice and could inadvertently bust the plan… (which I originally thought I was doing by NOT taking it….).
Much appreciation for all the help – the expertise on this site is such a resource! Thank you!2017-10-06 19:24, By: Baxter, IP: [188.8.131.52]
L23: Busting plan in last year…If you are still concerned, I would go over his head, and ask for a manager, supervisor, or owner, unless he is a sole practitioner.
You could also ask him for a written citation of his understanding of the regulations.2017-10-06 19:33, By: dlzallestaxes, IP: [184.108.40.206]
L24: Busting plan in last year…I managed to complete the request to stop the withdrawal and it should go thru in time.
This may be completely splitting hairs, but is requesting that the “automatic withdrawal plan” connected to the SEPP be deleted/stopped considered “modifying” the plan? Or, are only modifications of distribution amounts considered modifications? Since my modification date isn’t until Oct 18 earliest, I didn’t make an error by making this request, correct?
Thanks again to all.2017-10-06 23:11, By: Baxter, IP: [220.127.116.11]
L25: Busting plan in last year…No error in making the request. Any automatic withdrawal plan can be stopped for any reason at any time. Since you are not taking any distributions this year there also will be no 1099R to report on your tax return. Your plan will simply end in about 2 weeks.2017-10-06 23:16, By: Alan S, IP: [18.104.22.168]
L26: Busting plan in last year…Baxter — You have made yourself paranoid.
After 10/18/2017 you no longer have a SEPP 72-T. At that time it will be 60 months from your first distribution, and you will be 59 1/2. Therefore you satisfy both conditions for the SEPP 72-T plan to AUTOMATICALLY TERMINATE. There are no options. You could not continue operating under the provisions of SEPP 72-T because there would not be any 10% “EARLY” DISTRIBUTION because you would be over 59 1/2.
STOP WORRYING. RELAX. GET A GOOD NIGHT’S SLEEP. You’ve earned it.2017-10-06 23:46, By: dlzallestaxes, IP: [22.214.171.124]