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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3687
Experience:  Providing Financial & Tax advice since 1986
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I have a 72t which I started at age 57 first payment 1/2010

Resolved Question:

I have a 72t which I started at age 57 first payment 1/2010 I am now 61 what are the tax ramifications? tax on 72t distribution at age 61 before 5years of payment
Submitted: 8 months ago.
Category: Tax
Expert:  Lane replied 8 months ago.

Lane :

Hi,

Lane :

Sounds like you already have a feel for this ... a 72t payment (part of a series of substantially equal and periodic payments) must be adhered to unilt age 59 and 1/2 (OR whichever is linger) to continue to have the penalty - 10% -waived)

Lane :

Sorry or the typo ..."OR 5 years, whichever is longer"

Customer:

What are thx ramification if I need money

Lane :

Just that the 10% penalty is now NOT waived on the amount you take this year, that's over and above the amount of the SEPP payment, that's all

Customer:

Wait this is an Ira I have been taking payments since January 2010 at age 57. I am now 61 How will the IRS treat this frm a tax stand point. In my readings I saw they can go back two years and treat this as a premature distribution and access penalties? Please explain in detail. Thanks

Lane :

You've already (or should have) been paying tax on the money, it's just that the additional 10% penalty tax has been waived because of the 72t arrangement

Lane :

OK hang with me here....

Customer:

Thanks

Lane :

You are absolutely spot on ... they will go back and charge the 10% penalty on the years that you took the distribution BEFORE 59 and 1/2 ... however, once that happens and they have brought you tax account current, because you are now over 59 and 1/2 the $ are simply added to you income and taxes as regular income for the year you take it out (I'm assuming you already paid the tax on the money and simply did not apply the penalty IRA distributions of pre-tax money are ALWAYS taxable)

Lane :

Make sense?

Lane :

Because they WILL go back to the years before 9 and 1/2 and charge the 10% additional on THOSE distributions ... the 72t is null and void... but NOW you're just taking out distributions AFTER age 59 and 1/2 (the 5 year rule is no longer applied, once the 7t2 had been voided

Lane :

they go back and get the 10% up to the time you would have been able to distribute without the penalty (age 59 and 1/2)

Lane :

But now that it's done, you are like anyone else taking distributions from their IRA after age 59 and 1/2 ... it's taxable, but no additional 10% penalty

Lane :

Questions?

Customer:

Yes I have paid taxes on all distibutions. Let me understand so they will assess a 10 percent penalty before 59 and a 1/2. on all distributions. Does the Irs also charge interest on those distributions before 591/2

Lane :

Yes, they can, just a late payment penalty on the tax owed

Lane :

You MAY, however be able to ask for an abatement for reasonable cause, however,

Lane :

Here's what the Journal of accountancy says about firs time abatement of penalty:

Lane :

[You] will not be disqualified from receiving an FTA based on lack of a clean penalty history if the client:



  • Had a penalty assessed more than three tax years prior to the tax return in question.

  • Had an estimated tax penalty assessed in the past three years.

  • Received reasonable-cause relief from penalties in the past.

  • Received an FTA more than three tax years prior to the tax return in question.

  • Has penalties on subsequent tax years.

Lane :

Still with me?

Customer:

yes sorry

Lane :

sOK ... just making sure you were there

Lane :

Take your time... I'm here

Customer:

What is a reasonable cause for an fta to be granted?

Lane :

What Does the IRS Consider Reasonable Cause?


The IRS gives a long list of events that will be considered for reasonable cause. They are:



  • Ignorance of the Law (you must demonstrate you made a reasonable effort to learn the law though)

  • Error or Mistake was Made, but you must still show "due diligence, ordinary business care and prudence" have been exercised.

  • Forgetfulness, but you must still show "ordinary business care and prudence"

  • Serious Illness, Death, or Unavoidable Absence

  • Unable to Obtain Records

  • Incorrect Advice from a competent tax professional

  • Incorrect advice directly from the IRS, written or oral.

  • Fire, Casualty, Natural Disaster, Other Disturbance

  • Acts of God


The Internal Revenue Manual goes on to say that any reason will be accepted as reasonable cause if it can be shown that the taxpayer exercised ordinary business care and prudence and, despite that, was still not able to comply with their tax obligations.

Customer:

How is the late penalty calculated, More specifically is it calculated for each payment up until 1/2014 when I take the withdrawal. Thanks

Lane :

Sure let me gt that for you ... while I'm doing that let me go ahead and give you the process for requesting abatement:

Lane :

Submitting a penalty abatement request


This is the actual process of requesting penalty abatement:


The IRS gives three ways to request an Abatement of Penalties:



  • A written petition, which is the most common method and goes directly to an appeals officer generally) who has a larger scope.

  • Verbally in person or over the telephone

  • IRS Form 843 - Usually a Form 843 is filed with a written "brief" or petition


Typically, a petition will comprise of a formally structured letter with an introduction, the request for penalty relief under which relief program(s).

Lane :

  1. From: http://www.irs.gov/uac/Newsroom/Eight-Facts-on-Late-Filing-and-Late-Payment-Penalties ... If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

Lane :

Here's an excellent article on this (also discisses the reasonable cause abatement): http://taxes.about.com/od/backtaxes/qt/irs_tax_penalty.htm

Customer:

Thank you can you send me our chat by Email. This has been very helpful. Thanks

Lane :

So sorry ... JustAnswer won't let us do that HOWEVER, you can come back here: http://www.justanswer.com/tax/844zt-72t-started-age-57-first-payment-1-2010.html feel free to bookmark the page also (save as a favorite) ... you can also do a "file-print" from your browser and finally , once you rate my answer, this will stay on you home page, essentially forever

Lane :

(you could also copy this and/or the address link I gave you and paste it into a word document)

Customer:

Ok Thanks fir your help. I will review later

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, again, if you need more on this, please come back here, so you won't be charged for another question.

Lane :

Thanks so much, and again, if it's on THIS issue just come back any time, and it will still be a part of THIS question

Customer:

You got it thanks

Lane :

You're vry welcome ... I'd definitely go for the abatement .. all they can do is say no

Customer:

Thank you I gave you an excellent

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3687
Experience: Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 8 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 8 months ago.

Thanks so much

Lane
Expert:  Lane replied 8 months ago.

Looks like the credit finally came through on this none (I think there was a system problem ... but the moderators got it fixed ... they're wonderful here)

As you learn more if you'd like to work with ME again, just go here: Lane

Thanks again,
Lane
Expert:  Lane replied 8 months ago.
Hi,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane

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