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Original Message Posted By: Denise Appleby Date: 5/14/2009 1:03:36 PM Subject: Benz v. IRS Hey Alan , From what I understand, it is saying that death and disability provides an exception to the recapture tax under IRC §72(t)(4). This allows the SEPP to be discontinued –period! When using another exception, such as higher education or first time homebuyer, the SEPP must be continued and the recapture tax is not an issue - therecfore it need not be addressed specifically. Just as we have always understood that if the SEPP continues as it should without, the recapture tax is not an issue. The summary opinion indicates that distributions under all of the other exceptions are permitted, in addition to the SEPP. If we go by the logic they use for 72(t)(2)(E), then we can extend that to 72(t)(2)(F) as it has the same language. This would mean that individuals can take distributions for any of the other exceptions without causing a modification. This includes: § Distributions for eligible medical expenses § Distributions to unemployed individuals for health insurance premiums § Payments to alternate payees pursuant to qualified domestic relations orders § Distributions due to a Levy § Distributions under the age-55 exception Here is the kicker. If I understand the Tax Court’s position, when one reaches age 59 ½, additional distributions (that would not be subject to the penalty because of reaching age 59 ½), is also permitted. Now, this would be a big contradiction to the substantially equal payment theory- or would it? It could be a good thing for taxpayers if the Tax Court is right. The individual who takes a SEPP usually take amounts that cover everyday expenses. Someone who started a SEPP (say) four years ago may not have anticipated needing extra withdrawals to cover unemployment-health-insurance or medical expenses. Many individuals make these withdrawals because they have nowhere else to turn. They are bombarded with information about the negative effects of taking distributions early and we would like to think that many would avoid taking these distributions if they could. When it comes to some of these exceptions, adding the 10% penalty would seem like making a bad situation worse for a taxpayer who feels he/she must tap into retirement funds just to cover necessary expenses. Personally speaking, I hope the Tax Court is right. IMHO, it would seem to be only fair.
Hey Alan ,
From what I understand, it is saying that death and disability provides an exception to the recapture tax under IRC §72(t)(4). This allows the SEPP to be discontinued –period!
When using another exception, such as higher education or first time homebuyer, the SEPP must be continued and the recapture tax is not an issue - therecfore it need not be addressed specifically. Just as we have always understood that if the SEPP continues as it should without, the recapture tax is not an issue.
The summary opinion indicates that distributions under all of the other exceptions are permitted, in addition to the SEPP. If we go by the logic they use for 72(t)(2)(E), then we can extend that to 72(t)(2)(F) as it has the same language. This would mean that individuals can take distributions for any of the other exceptions without causing a modification. This includes:
§ Distributions for eligible medical expenses
§ Distributions to unemployed individuals for health insurance premiums
§ Payments to alternate payees pursuant to qualified domestic relations orders
§ Distributions due to a Levy
§ Distributions under the age-55 exception
Here is the kicker. If I understand the Tax Court’s position, when one reaches age 59 ½, additional distributions (that would not be subject to the penalty because of reaching age 59 ½), is also permitted. Now, this would be a big contradiction to the substantially equal payment theory- or would it?
It could be a good thing for taxpayers if the Tax Court is right. The individual who takes a SEPP usually take amounts that cover everyday expenses. Someone who started a SEPP (say) four years ago may not have anticipated needing extra withdrawals to cover unemployment-health-insurance or medical expenses. Many individuals make these withdrawals because they have nowhere else to turn. They are bombarded with information about the negative effects of taking distributions early and we would like to think that many would avoid taking these distributions if they could. When it comes to some of these exceptions, adding the 10% penalty would seem like making a bad situation worse for a taxpayer who feels he/she must tap into retirement funds just to cover necessary expenses.
Personally speaking, I hope the Tax Court is right. IMHO, it would seem to be only fair.