What Happens If I Don’t Maintain My 72(t) Distribution Correctly?
There are several ways you can “bust” a 72(t) SEPP distribution and the consequences can have a severe financial impact if the account is not managed properly. If you take any more (or any less) than the scheduled amount, or make any change to the frequency in payments (i.e. monthly, annually, etc…) or stop the distributions prematurely, the 72(t) SEPP is busted. And here’s where it gets messy:
Let’s say you’ve been taking your approved 72(t) distributions for 4 years. Same amounts, on time, no variations. If after 4 years one of the previously mentioned faults occurs, the IRS will assess the penalty tax on your latest distribution, and RETROACTIVELY assess the tax on all distributions taken, PLUS interest. Say you’ve been taking $20,000 of income per year over the last 4 years… that’s $80,000 total and you can expect a tax bill from the IRS for more than $8,000 due immediately.
In the end, it is crucial for an individual to work with an experienced team of specialists when establishing a 72(t) distribution. Most Investment Advisory Firms (as well as most Accountants, Attorneys, Banks and Online Brokers) are not very familiar with this strategy, and many choose to avoid it altogether due to the complexities and potential implications.
If you would like to connect with our experienced team of specialists, please contact us today.