72t bust interest calculation
If one busts a 72t prematurely,
1. is it 10% on the entire amount withdrawn from the onset and how is the additional interest calculated (what interest rate used)?
2. can you bust it in any month?
Has there been any discussion with the current market declines on allowing one to temporarily suspend 72t distributions?
Permalink Submitted by Alan Spross on Fri, 2008-11-21 02:33
No discussion relative to suspending 72t distributions, but if your account runs out of funds, you do NOT bust the plan.
The 10% penalty applies to all distributions since the inception of the plan for which the penalty was waived as a result of the plan. The interest is calculated using the various quarterly underpayment penalty rates from the due date of the return. Since it is nearly impossible to figure the interest charge yourself, you would normally just pay the penalty using Form 5329 and let the IRS bill you for interest.
There are two types of busted plans:
1) A voluntary bust where you elect to end the plan as of 12/31 of a year and start a new plan the following year with a new calculation. The new plan must still run the longer of 5 years or until age 59.5. In this case, the penalty stops with the year prior to your new plan.
2) The more common bust is that you simply need to take out too much money in a year where you cannot justify a new plan replacement using the amount distributed for that entire year. In that case the penalty will include the current year where you took out too much. After that year you either start a new plan or you don’t depending on your circumstances.
You may have more questions based on the above data.
Permalink Submitted by mk foss on Fri, 2008-11-21 02:39
If you bust a 72t (for a reason other than running out of money), you are to amend the return for each year that you’ve claimed an exception to the penalty and calculate interest on that amount using regular IRS interest rates. For example, if you took a $4,000 distribution in 2006, you’d amend the return owing $400 plus interest on $400 from April 15, 2007 until the amended return is filed.
Each year that you claimed an exemption from the 10% penalty would be amended in a similar way.
Permalink Submitted by richard wehrman on Fri, 2008-11-21 04:23
Process if i decide to change to the RMD calculation method?
Best to start in January (need to wait for 12/31/08 balance)?
Do you have to recalculate every year? i.e. would the withdrawal amounts change
Do you have to use the original interest rate assumptions? Or current?
Do i use my current age or the age when i started the 72t?
Permalink Submitted by Alan Spross on Fri, 2008-11-21 04:38
Yes, the RMD method is geared to a calendar year, and although the IRS has not specifically ruled against a mid year change, I would not risk it. Use the 12/31/08 balance and make the change effective 1/09.
Yes, you must do a new calculation each year using the prior year ending balance and the age you would reach as of the end of the new year. It is best to use the single life expectancy table, which is not beneficiary dependent and results in a larger distribution than the joint and last survivor table. Obviously, the annual distribution is subject to considerable fluctuation with this method. In addition, you remove the option of the one time change to RMD, since you are already there.
Interest rates are not a factor with the RMD method.
Use the age you will reach in the respective year. The change in divisor tends to get you a slight increase each year, but it will certainly not overcome a large account balance reduction.