IRA 72(t) SEPP distribution

[Baggi]

I'm trying to decide if Turbo Tax can do a Substantially Equal Periodic Payment or SEPP.

Or do I need to hire a CPA?

The rules seem to apply to me and I went online and looked at a calculator and I think I know the amount I can withdrawal.

Is there a way to do this in Turbo Tax?

I assume the process is, I take a distribution from my IRA (I'm separated from my previous employer and have 295k in my IRA) and I make sure that distribution is annual and it's substantially the same every year. I'm 51, so I'll have to make this same distribution until I'm 59 1/2 years old each year. I do not make any contributions to this IRA (My money is currently in a self directed IRA) and the only money that goes into this account is from a home I own that is actually owned by the IRA and the rent goes into the IRA (The 72t rules say you can't make any contributions and I'm thinking the rent on the house owned by the IRA isn't considered a contribution).

Ok, so, if I've got all of this right, can I do this through Turbo Tax next year if I want to take a SEPP starting this year and each year until I'm 59 1/2 years old and just make sure I stay under the calculated amount?

Thanks for your help!

[Baggi]

BTW, I found this definition of "contribution" on the IRS.GOV website and I think based off this definition and the fact that my IRA owns the house and receives the rent from the house, it's not considered a contribution.

"

Contributions

To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. For tax years beginning after 2019, there is no age limit to contribute to a traditional IRA. Compensation for purposes of contributing to an IRA doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation. In certain cases, other amounts may be treated as compensation for purposes of contributing to an IRA, including certain alimony and separate maintenance payments received, certain amounts received to aid in the pursuit of graduate and postdoctoral studies, and certain difficulty of care payments received"

[DoninGA]

You must set-up the SEPP with the plan administrator of the IRA. 

Once that is accomplished your distributions from the plan will be reported on a Form 1099-R.  On the form there should be a code of 2 in box 7 indicating Early distribution, exception applies (under age 59½) so that you will not be assessed the 10% early distribution penalty on your tax return.

For detailed information for a SEPP go to this IRS website - https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments

[Baggi]

Thank you for the quick response!

I called my IRA, which is Equity Trust, and they said I had to work with a tax preparer and they weren't involved.

If they don't do it, sounds like I can't do it?

[DoninGA]

I'll page one of our experts who may have further guidance for you.

@dmertz  do you have more information concerning SEPP?

[dmertz]

The the SEPP plan doesn't have to be set up by the IRA custodian, but there are benefits to doing so such as, as DoninGA mentioned, the reporting of these distributions with code 2 so that you won't have to file Form 5329 to claim the SEPP exception to the penalty, but many IRA custodians don't want anything to do with it; Employer plan administrators tend to be more cooperative with regard to SEPP plans.

TurboTax is tax-return preparation software, not software that can assist you in determining the necessary distribution amount.  You can determine the annual distribution yourself, request the distributions to be made, then claim the code 02 exception on line 2 of Form 5329 when the distributions are reported as early distributions.  TurboTax makes this entry for you on Form 5329 when you enter the amount on which you are claiming this exception.  That's all TurboTax can do.  Be aware that failing to adhere to the strict SEPP requirements at any time will result in a recapture of all of the early-distribution penalties that had been avoided under the plan, so SEPP plans are inherently risky.

IRS Notice 2022-6 details the three permitted methods of calculating the required annual payment:

https://www.irs.gov/pub/irs-drop/n-22-06.pdf

[Baggi]

Thank you very much for this response. Yes, I will have to continue to do this every year for 8 years and I won't be able to make any other distributions from my account during this time. That's a tough one for me but may be necessary. I will talk to my IRA Custodian again and see if they can help but I don't think they will.

They have distribution software (They call a wizard) and it offers a "one time distribution" or "recurring" distribution, however, the recurring distribution doesn't have an option for annual and I really just want to take this distribution 1 time a year.

Also, I used several different calculators online to figure out what my maximum distribution would be and it's around 18,000 and I only want 13,000 so I think I'll be safe there.

The biggest part for me is saving the 10% while obtaining the distribution. Taxes are already a big enough bear to deal with, let alone a 10% penalty? Yuck.

[Baggi]

dmertz,

I put in the information from my form 1099-R but I didn't see any option to claim a SEPP or fill out the form 5329.

I didn't see a way to make an exception or to tell Turbo Tax that this is a SEPP.

Any help here? Do I need to upgrade to a better version of Turbo Tax?

Thanks!

[dmertz · Accepted solution]

Under Other Tax Situations there is a section for Extra tax on early retirement withdrawals.

[Baggi]

Perfect! Thank you!