SEPP Modification

I have what I think is a simple and straightforward question.

T-IRA owner modified his SEPP
Client is being told by his accountant the 10% penalty applies in year of modification only

I am under the impression the 10% penalty applies for both the current year and retroactively to all previous years.

Who is correct? Anything else I need to be aware of?

Thank you!



You are correct. The 10% penalty (recapture tax) applies to the total pre tax distributions taken since the plan began  for which the SEPP penalty exception either appeared on the 1099R or was claimed by the taxpayer on Form 5329. The IRS may also bill late interest for penalty payments due for prior years. The accountant should refer to p 25 of Pub 590 B. The entire penalty is reported on line 4 of Form 5329 only IN the year the plan is busted, but includes the amount “that would have been imposed had the exception not applied plus interest for the deferral period.” There is no way to compute the interest, the IRS will have to bill that afterwards if they choose to.



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