72 T Distribution

[Florida_EA]

Client is 57 years old and has 100,000 in IRA account. Due to financial reasons he wants to get 300 to 400 a month from the IRA now. When he reaches 59 1/2 he would like to switch to a different amount or stop taking it. He does not qualify for any exceptions for early withdrawal but would like to know the tax implications of the 72 T distribution. He understands that he will get taxed now on the the distributions without penalty but would like to understand how long he will be tied to the current monthly distribution and when he reaches 59 1/2 if he could switch to another amount or stop taking it altogether

[jmcdtax]

See: https://www.irs.gov/retirement-plans...dic-payments#1

Is there an exception to the tax for distributions in substantially equal periodic payments?

Yes. If distributions are made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary, the §72(t) tax does not apply. If these distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply. If the series of substantially equal periodic payments is subsequently modified (other than by reason of death or disability) within 5 years of the date of the first payment, or, if later, age 59½, the exception to the 10% tax does not apply. In that case, your tax for the modification year is increased by the amount that would have been imposed (but for the exception), plus interest for the deferral period.

[Rapid Robert]

He will be tied to the (annual) distribution for life. If it was so easy to take penalty-free distributions before age 59.5 as your client imagines, wouldn't everyone be doing it?

See also addition info in Pub 590-B, especially the section "Recapture tax for changes in distribution method under equal payment exception."

[Gene V]

He will be tied to the (annual) distribution for life. If it was so easy to take penalty-free distributions before age 59.5 as your client imagines, wouldn't everyone be doing it?

See also addition info in Pub 590-B, especially the section "Recapture tax for changes in distribution method under equal payment exception."

Disagree

See TTB page 13-3 §72(t)(4)
He can stop his periodic payments after 5 years or when he attains age 59 1/2. which ever is later. In Florida-EA case, he could change or stop his payments after he turns 62

[Rapid Robert]

Disagree

Thank you for "disagreeing" with the information I explicitly referenced in Pub 590-B.

[Gene V]

Yes, I agree with recapture of tax if change before age 59 1/2 or 5 years. Wasn't talking about recapture tax.

I'm disagreeing about "He will be tied to the (annual) distribution for life." I could be wrong about this--however, I read that after 5 years or 59 1/2 (which ever is later) that he could change or stop
distribution until his RMD

[Rapid Robert]

§72(t)(2)(A)(iv) "part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,"

That reads to me as "for life". You know, the same way as how a lot of people get married "until death do [they] part". :-)

[Gene V]

Question: Do you agree with §72(t)(4) that he could change his distribution amount after 5 years
or 59 1/2 ?
Question: If you agree, then how much can he change it too? Can he take out more or less? or can
he just stop distribution until his RMD.

I not trying to argue the point, just trying to understand. Because the way another Tax Planning
book put it.
Distributions made under the SEPPs (substantially equal periodic payments) exception do not need to
actually continue for the individual's entire life. Payments may be altered (or stopped completely) after the later of:[§72(t)(4)]
1. The date the individual turns age 59 1/2 or
2. The close of the five-year period beginning on the date the first payment was received.

[New York Enrolled Agent]

§72(t)(2)(A)(iv) "part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,"

That reads to me as "for life". You know, the same way as how a lot of people get married "until death do [they] part". :-)

RR - I think you also need to consider §72(t)(4) where modifications are discussed.

[terryats]

Your client may want to roll over an amount from his IRA to an annuity that can be set up to accomplish his goal. Talk to an insurance agent.

[Rapid Robert]

He can stop his periodic payments after 5 years

Disagree. He can stop his periodic payments at any time. See, I can play too! :-) But I won't bother any further. I guess if people want to take one phrase out of a post and use it to disagree with the entire post, even when the remainder of the post amplifies on the original phrase to encompass the alleged area of disagreement....then they will.

When someone is "tied" to something, it does not preclude them eventually breaking their bonds.

[Rapid Robert]

More importantly,

Why is this taxpayer not considering this:

"Qualified individuals affected by COVID-19 may be able to withdraw up to $100,000 from their eligible retirement plans, including IRAs, between January 1 and December 30, 2020."

Under the generous rules currently contemplated, almost anyone is going to be a qualified individual. Probably a better deal all around than 72(t), and much easier to report on tax return.

[RWG1950]

It has been my understanding the 72(t) withdrawal rules require (once such withdrawals begin) a minimum period of fixed withdrawals lasting to the later of age 59 1/2 or 5 years.
Altering or stopping the withdrawal amount in any way during this required period would subject the taxpayer to retro tax penalties & interest.
Once commenced, future withdrawals can be changed or stopped without penalties only after the required minimum withdrawal period has been satisfied.
It remains unclear to me if the 5 year period means 5 calendar/tax years or 60 months (for customers that begin monthly 72(t) withdrawals at a point during the year).
I've always made it a point to check with my customer's IRA custodian's customer service department before the customer initiates their withdrawals to make sure the customer fully understands these issues. Penalties can be big. A bad code in box # 7 of the 1099-R can ruin one's day.
My experience has also been that interpretation of the 72(t) 5 year (or 60 month) rule seem to vary somewhat among different IRA custodians.

[New York Enrolled Agent]

[
It remains unclear to me if the 5 year period means 5 calendar/tax years or 60 months (for customers that begin monthly 72(t) withdrawals at a point during the year).
.

I think the Tax Court answered that question in Arnold 111 T.C. No. 12. Rather than rely on my interpretation, it's best to read it yourself. Go to the Tax Court site and do the opinion search.

[RWG1950]

Thanks New York Enrolled Agent
After reading the Arnold case you cited, it appears to me that the five year period begins with the initial distribution
and must last at least five full years from this date, regardless of the withdrawal mode.
If anyone thinks my interpretation of this is incorrect, I'd be obliged if you'd let me know.