Busting 72(t)

Submitted by Josh Harmon on Mon, 2019-09-02 11:48

I have a client who began taking ESPP from his IRA in 2016. He just turned 59.5, but has only taken three annual 72(t) withdrawals. He’s considering busting the 72(t) due to a cash flow crunch. I have two questions: 1) Does he only have to pay the usual 10% penalty on the three withdrawals, or is there another penalty for busting the 72(t)? and 2) How do we alert the IRS of the 72(t) bust?



Submitted by David Mertz on Mon, 2019-09-02 12:48

  1. There is no other penalty (other than interest for effectively paying the early-distribution penalties late).  The recapture tax would be 10% of the three distributions made under the SEPP plan unless some other penalty exception could be used to reduce that, plus interest.  (I imagine that the interest is calculated as if the early-distribution penalties were due with the tax returns for the years in which the three distributions were taken, but paid late.)
  2. The recapture tax is paid by including it on line 4 of Form 5329 for the year in which the plan is busted and including a separate explanation statement with that tax return.  Since there would be no other distributions that would be subject to penalty (unless early distributions were made from a different IRA account that year prior to reaching age 59½), the only entry on the Form 5239 will be the recapture tax (including the interest) on line 4.


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