72 (t) Question

[djbobbydeese]

Hello All

Is anyone familiar with the exact step by step process to set up a 72 (t ) withdrawal plan while leaving your money with the TSP?
I am 53 years old, retired ATC. I am familiar with some of the online calculators but have the following questions. How do you set it up so that the IRS knows that you are getting monthly payments under the guidelines of 72 (t) . Also can you still make intrafund transfers?
Numerous calls to the TSP have yielded no info on this subject.

Thanks in advance

bobby d

 

[TRAFFIC_DOG]

A 72(t) is a contract for getting money out of an IRA prior to age 59 1/2.

You must first roll funds out of your TSP.. then set up your 72(t).

 

[clester]

There is a way I think, but its very difficult to get the IRS to recognize it. You could take out payments based on the 72(t) amount in the form of equal monthly payments from TSP, but TSP will code it as monthly payments , not 72(t) rules. You would need to include your computations and rational to IRS and risk audit. Your best bet is a transfer to IRA.

 

[djbobbydeese]

Thanks for the response

I have read from some other sources that the TSP certainly qualifies for the 72 (t) rules but have not found any one who uses 72 (t) and stays in 100%
in TSP. So what I am hearing now is that you MUST do a rollover out of TSP to take advantage of 72 (t)????

 

[djbobbydeese]

So the big question as posed by clester is "getting the IRS to recognize it"
come tax time I would need My 1099R show a "2" in box 7. when coded "2" in box 7 The IRS has proof that the funds are not subject to the 10% penalty.

 

[gavinman]

Look at form TSP-70 - Request for Full Withdrawal.

Under withdrawal election you can check - monthly payments have TSP compute payment based on your life expectancy. They only figure it one of the eligible ways.

Here's a link to the form:

http://www.tsp.gov/cgi-bin/byteserver.cgi/forms/tsp-70.pdf

 

[clester]

So the big question as posed by clester is "getting the IRS to recognize it"
come tax time I would need My 1099R show a "2" in box 7. when coded "2" in box 7 The IRS has proof that the funds are not subject to the 10% penalty.

Searching the forums on www.72t.net I found that you need to file a form 5329 with your taxes to claim the exemption. It seems simple. That is with IRA. I think TSP would qualify also.

 

[clester]

Searching the forums on www.72t.net I found that you need to file a form 5329 with your taxes to claim the exemption. It seems simple. That is with IRA. I think TSP would qualify also.

I am about 1 year from retiring and will either transfer tsp to someone like vanguard or get payments from tsp. Vanguards brochure on 72(t) says that they will code any withdrawals as a "1" (early distribution). They say you will have to file a irs form 5329. It appears from my research that everyone taking early withdrawals will have to file that form. So, if TSP funds are eligible for 72t, you could do the calculations yourself (say amoritization method) and request monthly payments from TSP in that amount and file a 5329 at tax time.
attached is the vanguard brochure. look at page 13

Anyone have an opinion on the validity of doing this?

 

[clester]

A little more research here. From the TSP website

"The Internal Revenue Code, in 26 U.S.C Subsection 7701(j), states that the TSP is to be treated as a trust qualified under 26 U.S.C. Subsection 401(a) which is exempt from taxation under 26 U.S.C. Subsection 501(a).

From the IRS revenue ruling 2002-62 (describes the 72t particulars)

72t(1) Section 72(t) provides for an additional income tax on early withdrawals from qualified retirement plans (as defined in 4974(c)). Section 4974(c) provides, in part, that the term "qualified retirement plan" means (1) a plan described in 401 (including a trust exempt from tax under 501(a)), (2) an annuity plan described in 403(a), (3) a tax-sheltered annuity arrangement described in 403(b), (4) an individual retirement account described in 408(a), or (5) an individual retirement annuity described in 408(b).

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in 72(t)(1) will not be applicable.

The 3 methods are then listed. (amoritization, annuitization, and minimum distribution)

So, it seems pretty clear TSP would qualify for 72(t).