72-T election to withdraw from an IRA prior to age 59 1/2 without pena

[Guest bink]

entered into 72-t agreement 2 years ago at age 50. elected the highest amount to withdraw annually till age 59 1/2. based on IRA balance at that time, $400,000 annual payments projected to be approx. 29,000.

funds invested in biotech, which the market has not treated kindly. consequently the funds will run out prior to age 59 1/2 and i am told that the 10 % penalty would be assessed.

questions:

1. the 10 % penalty- will it be assessed on the original amount of 400,000 or on the amount received, say 250,000.

2. the 10 % penalty-will it be assessed in the year that the 72-t ceases to provide the 29,000 or do i have to amend all the prior years that i received withdrawals?

3. knowing that the plan will fail, can i elect out of the 72-t and pay the penalty for years that withdrawals were taken.

4. or, any other suggestions to get me out of this muck!!

many thanx

john

[BPickerCPA]

1. It's possible that the IRS will permit you to lower the payout. I have a ruling request into them now. Ruling requests cost several thousand dollars for professional and filing fees.

2. Otherwise, it would be better to stop now and pay the penalty up to this point. You could then start a new program next year with the lower payout.

[Bruce Steiner]

If the penalty applies, the penalty is 10% of the prior distributions. In addition, since the penalty is imposed in the year of the modification, there is an interest charge, so as to put the IRS in the same position as if you had to amend the back years.

I, too, have a ruling request pending on this issue, and I know of another lawyer who is about to file one. Given the Enron collapse, it's possible that there may be more such cases. To date, I'm not aware of any case law or rulings directly on point.

While it may not be much consolation, the IRS has approved hybrid methods in which taxpayers used the amortization or annuity method (which generally permits substantially higher distributions than the MRD method), while also permitting the use of the current account balance each year. PLRs 200051052, 200020063.

For more than you ever wanted to know about avoiding the penalty on pre-59.5 distributions, see my article on this subject in the January 2000 issue of Estate Planning. The lawyer who handles your estate planning should subscribe to this publication.