L1: Separating IRA’sSituation. Age 56. Been taking $1,000/month, $12,000/year72t since January 2005. In January 2010, needed to raise it to $2,000 per month due to financial issues(family business going bad). At the time, we didn’t know whether this was going to been temporary for a few months (still staying under the $12,000 for the year) or permanent. It’s now gone on for 12 months, so 72t is busted.
We would like to “restart” a new 72t for the $24,000/year, however, taxes on penalty and interest from busting the original are going to be owed which needs to come from these assets. If wecould separate the IRA, we could use the larger one for the new 72t and use #2 to pay the taxes.
Thanks for your help. 2010-11-29 20:40, By: Confused, IP: [220.127.116.11]
L2: Separating IRA’sSince the SEPP plan is already busted, you can divide the IRA into 2 accounts. However, the new calculated annual distribution must only be based on the SEPP IRA account, not the total amount.
For the busted SEPP, you will owe the 10% penalty on all previous distributions since 2005 and the IRS will calculate theinterest on the past due penalties.At age 56, to get an annual distribution of $24/year, you would need about $498,216.46 in the SEPP IRA account. I would also want until 2011 to start the new plan and I would only start it again if I knew I could live for the next 5 years with $24k.2010-11-29 21:07, By: Gfw, IP: [18.104.22.168]
L3: Separating IRA’sSounds like the penalty and interest would be very roughly around 10k. Due to the business problems perhaps there is a way to incorporate a different penalty exception (perhaps high medical costs or medical insurance if you were eligible for UC) to cover some of this year’s penalty.
While it is much cleaner to report the busted SEPP at this time and start over in January, it is technically possible to report the bust as of the actual date that the 12,000 amount was exceeded. You could then start another plan in December, 2010 and elect to withdraw the full annual amount for 2010 from the new plan. That would cover the penalty and interest you will owe and avoid paying a penalty for a distribution to pay the busted 72t penalty. The downside of doing this is that the IRS will probably not understand what is happening and you will have to provide an explanation that you can only hope they understand. So it’s a tough choice between the cleaner and most expensive solution of waiting until 2011 vrs the added cost of funding your penalty with a special early distribution prior to starting the new plan.2010-11-30 04:37, By: Alan S., IP: [22.214.171.124]
L4: Separating IRA’sExcellent idea by Alan. But I’m not sure it will save any penalty. By the June withdrawal, he has already taken the $ 12,000 for 2010. When he took July he busted the plan retroactively. The $ 10,000 he took in July thru Nov is subject to the early distribution penalty of 10% or $ 1,000.
However, couldn’t he have started the new plan as of July 2010, using the 6/30/2010 balance to establish the higher withdrawal rate of $ 24,000/year. Then, since he already took $ 10,000 thru Nov., he could take $ 14,000 in Dec. for his $ 24,000 under the new plan ?
2010-11-30 15:37, By: dlzallestaxes, IP: [126.96.36.199]
L5: Separating IRA’s>>However, couldn’t he have started the new plan as of July 2010He coulds have, but he didn’t. And he probably has nothing to document that he did – an IRS auditor wouldhave a lot of fun if he decided to adopt a retroactive plan and ended up in an audit.
You are right about the penalty on the $10k, but he also owes the 10% penalty plus interest back to 2005.The 10% penalty would be on about $74,000 or $7,400 plus interest.2010-11-30 15:43, By: Gfw, IP: [188.8.131.52]
L6: Separating IRA’sOk. But in January 2010 he in effect did decide to start a new plan when he changed his monthly withdrawals from $ 1,000 to $ 2,000. If he documented his IRA balance as of 12/31/2009, would that be ok since there is no “formal” way to “adopt a plan”, assuming the figures work out?
Of course, we would need to know his balance at that time, and the interest rate, to see if that would even be viable.
Just a thought.2010-11-30 15:53, By: dlzallestaxes, IP: [184.108.40.206]
L7: Separating IRA’sI’ll stand by my previous post.
However, the plan was busted only when he took out more than the planned annual distribution. At that point, he could have stopped the first SEPP and started a new SEPP.
Knowing the 12/31 (or the 06/30)balance is easy. Question… Did he notify the trustee/custodian that he stopped one plan and started another? Did he tell his accountant? Did the fund balance and the appropriate interest rate generate exactly $24k?2010-11-30 16:17, By: Gfw, IP: [220.127.116.11]
L8: Separating IRA’sAs usual, all valid points.
Hopefully, in the future, those in similar straits will follow the guidance of terminating one plan and starting a new plan in order to reduce their exposure to penalties.2010-11-30 16:55, By: dlzallestaxes, IP: [18.104.22.168]
L9: Separating IRA’sAs always, thanks for all of the good feedback. It appears that it would be in our best interest to hire a professional to help make the best decision, help document, etc. I’ve not found anyone in our city who is familiar enough with 72t. Any suggestions?2010-12-01 18:59, By: Confused, IP: [22.214.171.124]