IRS Penalty Interest Rate

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L1: IRS Penalty Interest RateThanks for a very informative website!

The 72t Distribution Calculator default value for the IRS Penalty Interest Rate is 9.00%. Is this correct or should it be 10.00%?2003-10-23 11:32, By: Lud, IP: [127.0.0.1]

L2: IRS Penalty Interest RateThe 9% rate is only a default – you should use theactual rate when doing your calculations – maybe we’ll add it to our interest rate table.2003-10-23 15:54, By: Gfw, IP: [127.0.0.1]

L2: IRS Penalty Interest RateAfter re-reading your question, a little further carrification. The penalty to bust the SEPP is always 10%. However, in addition to the 10% penalty, there would also be interest due on the penalty on all prwvious payments – this is what we are caling the IRS Penalty Interest Rate – currently it is about 4%2003-10-26 09:08, By: Gfw, IP: [127.0.0.1]

L2: IRS Penalty Interest RateHello Lud:
Just to expand a little bit; busting a distribution plan will bring into effect a 10% penalty (actually classified as a surtax; however 10% is still 10% no matter what it is called) on the amount cummulatively withdrawn. In addition, these 10% surtaxes stack up like a layer cake each with a different due date; thus, your first 10% penalty might have been due 5 years ago for the distribution you took in 1999. As a result, the interest due on the penalty is also due for a period of 4 years remembering that the interest rate on past due taxes moves around such that you might owe 8% for 1 year, 5.5% for two years and 4% for the most recent year.
Then, as if to add insult to injury, the sum of the 10% penalties plus the cummulative interest due is potentially subjected to the under withholding penalities and interst depending on your individual circumstances.
Botoom line, the cost of busting a SEPP plan gets very expensive very quickly. There are lots of variables at play but you can roughly estimate that the sum of all penalties and interest will equal the normal annual distribution in approximately 6 – 8 years. Said another way, assume you are supposed to take $50,000 every year for 8 years and do so for the first 5 years; terminating the plan in year 6.As a result, the sum of all penalties & interest due sometime in year 6 or early year 7 will approximate $40,000.
Then the final insult, what if you don’t have $40,000 laying around & have to again hit your IRA just to acquire the funds to pay the IRS; then, you will incur another $4000 penalty plus regular income tax due on the withdrawal.
In summary, breaking a SEPP plan is extremely painful; best never to do it. If you must, do it as early in the plan as possible.
TheBadger
wjstecker@wispertel.net

2003-10-26 09:35, By: TheBadger, IP: [127.0.0.1]