What happens when you intentionally break a 72t?
L1: What happens when you intentionally break a 72t?Hi,
We have a client that is 3 years into a 6 year term for being on 72t. He is contemplating the possiblity of intentionally breaking his 72t.
Assuming that he discloses this right away to the IRS, what are the penalties and interest that he could be charged? Do the penalties & interest include the 3 years he has been on 72t up to this point, or are the penalties and interest calculated for the entire 6 yr timeframe that he planned to be on 72t? What are the penalties & interest, or how are they calculated?
He is set up on a monthly payment of $1755.42 / mogross. 2008 was a partial year (11 payments) Annually, he has taken the following through 12/31/10:
2008 $19,309.62 / 2009 $21,065.07 / 2010 $21,065.04
Is there a form or IRS info that he would need to complete when doing his taxes, if he moves forward with breaking his 72t?
Any other details or information that he should be aware when deciding if he should do this? We recommend that he doesn’t break his 72t, but he may not have any other options for his situation.
Thank you2011-01-20 17:48, By: BRS, IP: [126.96.36.199]
L2: What happens when you intentionally break a 72t?It’s reported on form 8606, which is usually used to report non-deductible contributions, and the taxability of IRA and ROTH IRA distributions.
He will pay a 10% penalty of $ 6,100. He has already paid the taxes on the distributions he took.
At the point that he “busts” his SEPP 72-T, he could use those investments to set up a new SEPP 72-T based upon their present value, or even keep part of them in a separate account to use to supplement a new SEPP 72-T, even though those non-SEPP distributions would be the (only) amounts subject to a 10% penalty on these future distributions.2011-01-20 20:44, By: dlzallestaxes, IP: [188.8.131.52]
L3: What happens when you intentionally break a 72t?Agree, but the Form to report the busted plan is Form 5329 (not 8606)for 2010 which should be added to the 2010 return. Per Pub 590, p 52 (09 edition), show $6,144 on line 4 (the IRS will have to calculate the interest because we do not know the exact formula they use). Add a written explanation with recommended wording:
“I wish to modify my 72t plan effective 12/31/2010 per IRS letter ruling 1999- 09059. Amounts for 2008-2010 for which the early distribution penalty will apply is $61,440”.
As a result, a new plan can be started in 2011 if desired, using all the rules for a new plan including a new 5 year period.
After the return is filed, 2008-10 returns should be reviewed to determine if there are any other exceptions that would apply in the absence of the SEPP exception. There might be expenses that qualify and if so, amended 5329 forms can be filed to recover some of the penalty. If there are substantial alternate exceptions, please advise for alternate instructions.2011-01-20 22:55, By: Alan S., IP: [184.108.40.206]