What to do in the last year?

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L1: What to do in the last year?I decided to start a new message simply becuase the last thread on this issue is already 10 -12 long.
The question which often arises is what to do in the remaining end period during which a taxpayer has already satisfied the “5 year” rule but has nto yet attained the age of 59 1/2. To answer this question it is instructive to look to two places:
1. IRC 72(t)(4) which is the section that re-imposes the 10% surtax when a “modification” to the series of payments occurs. As a result, what will happen when a “modification” happens is very clear; what constitutes a “modification” is unclear.
2. Look at Arnold v. Commisssioner (111 TC 250, 1998). In this case the taxpayer took the 1st dsitribution in December of year one; took distributions in years 2,3,&4 and took a 5th distribution in January of year 5. So far so good. He then took another distribution in the fall of year 5 saying that he had already satisified the “5 year” rule. We know he did not in that the “5 year” rule would not be correctly satisfied for another 15 – 16 months. The keys to this case were twofold: (1) a clear definition of how to interpret the “5 year” rule as literally as 1828 days after the 1st distribution; (2) that is was THE EXTRA distribution in the fall of year 5 that constituted the “modification”.
As a result, when looking at our hypothetical situation, the key is for the taxpayer to avoid making an extra distribution that would cause a “modification”. I know this sounds backwards of what it should be; nonethless, that is the way the IRC was drafted and the courts have chosen to interpret it.
Thus, if one has satisfied the “5 year” rule but has not yet satisfied the age 59 1/2 rule, I am of the opinion the the taxpayer has 3 choices:
1. Make no distribution.
2. Make a full annual distribution.
3. Make a prorata distribution of the annual amount to account for the full months to be consumed say betweeen 1/1/xx until actually attaining age 59 1/2.


2008-04-02 08:03, By: TheBadger, IP: []

L2: What to do in the last year?Thanks for keeping an eye on us. After I read your book, my CPA told me I knew more about 72(t) than he did. 2008-04-02 19:46, By: Eureka, IP: []