Excess Distribution

L1: Excess DistributionI have a newly divorced client that recently set up a SEPP plan (1/07) to supplement her income from employment. She has since become unemployed, had medical expenses etc. and needs to withdraw additional funds from her IRA. She understands she will have not only income taxes, but the 10% penalty tax plus interest on all previous withdrawals. Since the SEPP planhasn”t been in place very long that will not be significant. BUT, I cannot find any information on how her SEPP plan will be treated going forward. Is it “busted” at that point;OR do all future monthly distributions continue asoriginally planned with no penalty tax going forward???2007-03-09 17:05, By: Houston, IP: [69.53.78.190]
L2: Excess DistributionHouston, we have a problem!
Since your client did not start the SEPP plan until 2007 & then is subsequently taking more in distributions; the easy way to think about it is that the SEPP plan never existed. However, carelfully check all of the other exclusin reasons to see if your client can qualify for those.
Because the SEPP plan never existed, ther are no required “going forward” distributions but she could launch a new SEPP plan later this year or in 2008.
TheBadger
wjstecker @wispertel.net
2007-03-10 09:45, By: TheBadger, IP: [72.42.66.171]

L2: Excess DistributionCheck the paperwork sentto thecustodian to see if 72(t) was indicated on the distribution forms. If your client can qualify for another exception to the 10% penalty, get the custodian “on board” to drop the 72(t) and go with the other exception. Also, get the custodian to simply treat all distributions an “early with no exception” so there in no 72(t) involvement.
Jim2007-03-11 15:13, By: Jim, IP: [24.252.195.14]

L2: Excess DistributionSee if she qualifies for exceptions in 72(t)(2)(B) and (D) re medical expenses. If so, she might do best by terminating her SEPP 72-T, and pay the 10% on distributions to date. Then use those exceptions to take distributions from the IRA which has then reverted to non-SEPP status. Warn her to always keep some funds outside of the SEPP for emergencies. (See numerous other postings on this area.)2007-03-11 17:11, By: dlzallestaxes, IP: [4.175.9.250]

L2: Excess DistributionShe should apply for unemployment since the medical insurance exception is linked to unemployment benefits, and that exception could also cover Cobra premiums as expenses. If coverage is insufficient and out of pocket unreimbursed medical expenses result, the medical expense exception could apply in excess of 7.5% of AGI.
If the SEPP is aborted at taxpayer”s option in the first year, there should be no need to pay any penalty if the other exceptions cover the IRA distributions. Any custodian 1099R coding including an “02” can be overrridden by a 5329 showing the applicable exception or code 12 if there are multiple exceptions. Of course, flexibility in escaping all early withdrawal penalties is very limited after the first year.2007-03-12 14:23, By: Alan S., IP: [24.116.66.98]

L2: Excess DistributionIt is my understanding that the 72(t) is busted. You would then have to go back as appropriate and run a new 72(t) calculation based on current applicable interest rates, etc…and subject to a new 5 yr. or age 59 1/2 effective period.
Hope that helps…Mark E. 2007-03-14 08:55, By: Mark E., IP: [70.88.112.173]