How do you report a Broken 72t for past years penalties

You are here:
< Back

L1: How do you report a Broken 72t for past years penaltiesMy DOB is 8/1/56. The initial amount in the IRA account was about $92000, so fortunately not a huge amount, just something to supplement my pension. I started receiving $498 each month from a 72t in December 2006. In January of 2009 I stopped receiving the 72t because I naively had Fidelty deposit $750 from credit card points I had on a Fidelty Visa into this account which was the only Fidelty account I had. I then started a new 72t withdrawl in the amount of $310 per month. The tax people I dealt with in 2009 insisted they didn’t think I would have to pay any penalties because I didn’t withdraw any additional amount and my mistake was minor. No, I wasn’t convinced but as any possible penalty and tax would be fairly small I let it ride.
In 2013, through family financial needs, I knowingly withdrew all of the remaining amount of the 72t which was approximately $84000, although I had Fidelty hold $40,000 of it in anticipation of Federal and State taxes and penalties. (Yes I know the penalties and interest are significant, but I’m quite satisfied with the choice I needed to make). Here are my questions. Do I have to pay the 10% penalty, along with interest, for all of the monies received since 2006, or for just 2013 and the preceeding 3 years? I’m thinking penalties and interest on all 72 monies received from when it began. To pay for the prior years, will I need to submit an amended 1040x form for each year along with a new 5329? Speaking with different professional tax preparers and they are unclear on this. Thank you for any assistance.2014-02-08 23:43, By: Viking205, IP: []

L2: How do you report a Broken 72t for past years penaltiesAs I see it, you busted the first plan in 2009 and did not report it, but 2009 is now a closed tax year. You did not grossly under report income, you just neglected to report the penalty, and for that I think that 2009 is closed. That said, the IRS may well take the position that you busted the plan in 2013, not realizing that you started another plan. You will need to have your calculations in order to show the IRS that you started a new plan in 2009.
Now that you have busted the 2009 plan as well, the aggregate 10% penalty should be reported on Form 5329, line 4 of your 2013 return. Do not enter anything on lines 1-3. Attach an explanatory statement breaking down the amount you recovered by year penalty free starting in 2009 under the new plan. Total the years up and pay 10% of that amount. It may be that you have another penalty exception for 2013 for some of your IRA distributions. If so, include that exception on Form 5329 and include that information with your explanatory statement. For 2010-2012 you do not have to amend those returns unless you have a different penalty exception than the SEPP for some of your distributions. If so file a 1040X for those years and request a refund. On the 1040X you will have to explain that you paid the penalty on the balance with your 2013 return. All this is messy, but it appears to be the only way to handle a change of exception reasons if you have them for a busted plan. Do not worry about late interest, as the IRS will bill that separately.
If you do not have other exception to substitute for 2010-12, the reporting is much more simple.
2014-02-10 04:52, By: Alan S, IP: []

L3: How do you report a Broken 72t for past years penaltiesThank you for the very helpful information. I have a couple of follow up questions:
1. In the letter to the IRS, should I mention about how the 1st 72 t began in 2006 and was then ceased due to the unintended deposit into the account, resulting in my begining a new 72t amount, or only talk about how the account began in 2009?
2. I live in California. Do I have to pay the 2% penalty, along with interest to the State for the prior years of receiving the monies from the 72t account from 2009-2012, or is this just a Federal issue?2014-02-10 19:08, By: Viking205, IP: []

L4: How do you report a Broken 72t for past years penalties1) I would only mention 2009 forwardunless the IRS itself refers to the old plan.
2) CA conforms to federal law on retirement plans except that the penalty rate is different. I thought it was 2.5% for CA return. The above advise therefore also applies to your CA return just at a different rate.
2014-02-10 22:14, By: Alan S, IP: []