possible modification to SEPP 72(t) ?

L1: possible modification to SEPP 72(t) ?Is a 401k rollover into a SEPP 72(t) considered a modification?

I set up my EXISTING SEPP 72(t) in July 2013[DATE OF BIRTH 12/17/1959] , and in June of 2014 I rolled over a 401k (approx. $5000) into an account tied to my SEPP 72 (t).
DATE OF FIRST DISTRIBUTION WAS JULY 21, 2013.

I did not know this 401k ROLLOVERmightnot be permitted?, nor did my financial adviser.

The amounts of my annual SEPP checks for 2013, 2014, & 2015 have all been identical amounts. I just talked with my financial adviser, and he said my 2016 check will be identical to my past checks, as will my 2017, and 2018 checks. (I turn 59-1/2 in 2019)

I found out today that a contribution to a SEPP might be considered a modification?
Is a 401k rollover considered a contribution?

Is my SEPP plan broken?

Do I need to make a correction? Meaning paying 10% penalty and other fines?

Thank you!2016-03-07 17:40, By: Fred Asperagus, IP: [206.55.187.242]

L2: possible modification to SEPP 72(t) ?Yes, the plan has definitelybeen modified by the rollover per Notice 2002-62, which uses the term “any addition” to such an account. Technically, youno longer have a valid plan.
To fix this you would have to file an amended return for 2014, reporting the 10% penalty amount for both 2013 and 2014 with Form 5329. However, with the amended return you could claim any other penalty waiver beside the 72t plan that you might qualify for some part of the 2014distribution. For your 2015 return, you would simply not claim the SEPP exception on Form 5329, but instead claim any other exception you might qualify for on some portion of the 2015 distribution.
For 2016 you could start a new plan if you wanted to. It would be based on all new balances and interest rates, and would have to run for at least 5 years.
Note that the 401k rollover would have been OK had it gone into a new IRA account or one not used as part of the SEPP. The advisor should have known this and perhaps should pay all or what you think is a fair portion of your additional tax.
The IRS may or may not bill for late interest on the 2013 and 2014 late penalty payment.
2016-03-07 23:54, By: Alan S, IP: [160.3.87.235]

L3: possible modification to SEPP 72(t) ?Thanks Alan, I’ve heard back from my financial advisor and tax preparer, and both have told my they can’t give me tax advice. I’ve tried calling the IRS, but can’t get thru to talk with anyone. Actually my tax preparer told me to ask the administrator of my plan, and the administrator told me I have two choices. 1. Don’t do anything. 2. Make the correction, and pay the penalty tax.
Though Technically I have a broken SEPP 72(t), Spiritually, I feel I’ve held up my part (except for the rollover) I’ve been getting the exact same payment for 4 years, so, I think I’m going to not do anything. The IRS has until April 2018 (3 years) to decide if I’ve done anything wrong in 2014 with the rollover.
Is it my responsibility to report that I have a “broken” SEPP? I’m not even sure if I’ve done anything wrong?
Could I ask you… What would you do in my place. Would you not do anything, Or, would you try to get your financial planner to pay the penalty tax?
Thanks!

2016-03-08 15:51, By: Fred Asperagus, IP: [206.55.187.242]

L4: possible modification to SEPP 72(t) ?I don’t think anyone is going to give you any advice to evade and not report, at least not on this website.
One thing you have to remember, your SEPP is between you and the IRS. Could you hold the planner liable… maybe, but what documented proof do you have that he/she created the error.
It is your responsibility to report the “Bust”. Will you be caught if you don’t report, maybe not, but any tax audit may reveal your error.
Also remember that tax avoidance is legal, but tax evasion is criminal. Your decision.
2016-03-08 16:03, By: Gfw, IP: [73.180.112.215]

L5: possible modification to SEPP 72(t) ?yes, you are right…. this is bugging me about being an evader.
I wish I could SEE documentation that a 401k rollover IS considered a contribution.
2016-03-08 16:17, By: Fred Aspergus, IP: [206.55.187.242]

L6: possible modification to SEPP 72(t) ?To view the documentation, click on the”72t/72q plans” tabon the top of this page, then on Notice 2002-62 inthe left box on the next page. Scroll down Notice 2002-62 to Section2 .02 (e), which clearly states thatadditions to a 72t planaccountconstitute a plan modification.
If the advisor knew that you had a 72t plan and yet told you that it is OK to roll anamount into the IRA account, he should be responsible for the consequences of your following his advice. This rule has always been clearly stated in IRS guidance for the last 27 years, and as such is not one of the more arcane and poorly documented rules that have developed over many years of IRS letter rulings on 72t plans. Notice 2002-62 is short and to the point, and while many advisors are not knowledgeable about 72t plans, this particular rule has always been clearly stated by the IRS. Had the advisor reviewed 2002-62 this rule would have been clear to him.
That said, the rule is not intuitive forusers of the fixed dollar calculation methods(you are using one of them)because adding to the account will only result in an increaseto your annual distribution if you are using the RMD method, or make the one time switch to the RMD method from a fixed dollar method.
2016-03-08 19:58, By: Alan S, IP: [160.3.87.235]

L7: possible modification to SEPP 72(t) ?Thanks Gfw & Allen S., You lit a fire under me, and it got hot! I took the train to downtown Minneapolis to talk with an IRS agent in person. (I couldn’t figure out their phone menu system.) They said my plan is not broken. Though the 401k rollover should not have been deposited, it did not break my SEPP plan. They showed me publication #590-B page 25 with the following quote.
“Recapture tax for changes in distribution method under equal payment exception. You may have to pay an early distribution recapture tax if, before you reach age 591 2, the distribution method under the equal periodic payment exception changes”.
The IRS agent said no modification has been made to my plan. I’ve been getting the same payment amount to the penny from my SEPP for 4 years now.
I suppose the “adding funds” rule is to discourage people who may want to change the payment amount? I don’t know… He also recommended to me to make sure my payment amount stays the same for the next two years, 2017 & 2018, then my plan is completed.
Thanks,
Fred2016-03-08 20:46, By: Fred Asperagus, IP: [206.55.187.242]

L8: possible modification to SEPP 72(t) ?Fred, did youpoint out to the agent what 2002-62 says? Would be very interested in his explanation. At this point it is not clear whether this agent did not know about this requirement, or did know but did not care. IRS enforcement of 72t related rules has been extremely spotty, which for many taxpayers I suppose is fortunate. It is also not clear if agents have been advised to overlook certain minor infractions since the IRS has produced so little in 72t guidance and their publications lack considerable detail on such plans.2016-03-09 01:34, By: Alan S, IP: [160.3.87.235]

L9: possible modification to SEPP 72(t) ?Alan S., No, I didn’t mention 2002-62, but in reading publication 590-B page 25: 2002-62 is for the Fixed amortization, and Fixed annuitization methods, apparently I’m not using these methods. According to the IRS, the amortization and annuitization methods are “more complex” and they point to Bulletin 2002-42 page 710 for more detail. 2016-03-10 09:48, By: Fred Asperagus, IP: [206.55.187.242]

L10: possible modification to SEPP 72(t) ?There are only three acceptable distribution methods allowed in a SEPP: Minimum Distribution, Annuity and Amortization. Any flat/level payment plan is based on either the annuity or amortization methods.
Rev. Rul. 2002-62 Section 2(e) is pretty clear.
e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.
The section you are describing in 590-B doesn’t deal with additions to the account, it deals with a possible change in payments from the account.
As I stated before, your SEPP is between you and the IRS. What an agent tells you is virtually meaningless and many times just plain wrong. You are seeking something that doesn’t exist.
2016-03-10 11:09, By: Gfw, IP: [73.180.112.215]