Tax, Penalty & Interest on Busted 72t??
L1: Tax, Penalty & Interest on Busted 72t??Great Site!
Client in divorce, has to withdraw all funds from IRA. Taxpayer (TP) is <59.5 yrs old and has been in 72t program since 2002. Of course, TP will incur tax plus early distribution penalty on amount withdrawn; however, I'm not clear on how penalty and interest are recaptured for deferral period starting in 2002. Thanks2009-08-13 20:00, By: Phil, IP: [126.96.36.199] L2: Tax, Penalty & Interest on Busted 72t??Try to talk the parties into leaving the IRA account as is until completion of all 72(t) requirements ... 5-years of distributions and age 59.5 ... and spliting the distribution amounts until completion.Once the SEPP Plan requirements are completedthey can divide the account without penalty. If they bust the plan now they will lose a bunch of money. Unfortunately "Divorce" is not one of the allowable reasons for busting a SEPP Plan. If the account is split, then penalties and interest will apply back to the first distribution in 2002. Jim2009-08-13 20:46, By: Jim, IP: [188.8.131.52] L3: Tax, Penalty & Interest on Busted 72t??If this is a court-ordered divorce, then the agreement should be for a QDRO. Under this the IRA, SARSEP, or 401-K/403-B must be DIRECTLY rolled int the recipient spouse's QUALIFIED RETIREMENT PLAN in a TRUSTEE-TO-TRUSTEE transaction in order to defer taxation and avoid penalty. According to Section 72t, distributions from QUALIFIED PLANS "made to an alternate payee pursuant to a qualified domestic relations order (QDRO)" are exceptions to the 10% early distribution penalty. Since the divorce attorneys apparently neglected or failed to inform the parties about the QDRO provisions,I suggest that they both fire their attorneys and get competent ones. It is incomprehensible that any competent divorce attorney would not have mentioned this as an aceptable way to avoid any current taxes, and all penalrties and interest. Also, if you follow Jim's suggestion, how do you protect the spouse from taking the entire retirement plan ? Further, any transfers that are a "consequence of divorce or separation" can be made up to 6 years later and still be considerede as part of the divorced/separation agreement.2009-08-13 22:44, By: dlzallestaxes, IP: [184.108.40.206] L4: Tax, Penalty & Interest on Busted 72t??Note that the penalty exception for QDRO distributions does NOT apply to distributions from IRA accounts per 72(t)(3). The two exceptions referred to in72(t)(3) following are the age 55 separation exception and the QDRO exception. Copy of limitation provision: >>>>>>>>>>
72(t)(3) LIMITATIONS. – 72(t)(3)(A) CERTAIN EXCEPTIONS NOT TO APPLY TO INDIVIDUAL RETIREMENT PLANS. -Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan. >>>>>>>>>>>>>>
2009-08-15 03:54, By: Alan S., IP: [220.127.116.11]
L5: Tax, Penalty & Interest on Busted 72t??OOPS. I forgot that he was talking about an IRA after I quoted about transfer to spouse’s qualified retirement plan. If she had a 401-k at work, she could have possibly transferred it there, and then taken a loan for up to 5 years, and then withdrawn and repaid the loan after reaching 59 1/2 to avoid the 10% penalty.
Thanks for catching my error. Rehire those attorneys.2009-08-15 04:17, By: dlzallestaxes, IP: [18.104.22.168]