72T
I have a client who started a 72T in late 2006. Without our knowledge she transferred about $50K to an annuity IRA in August 2007. Is her 72T busted up by this action or can she press on? It would seem that the transaction should not be characterized as a withdrawal since it was rolled over, but I’m just not sure.
Permalink Submitted by Alan Spross on Tue, 2008-02-12 22:19
The consensus had always been that a partial transfer to a fresh new IRA account, whether annuity or not, did not bust the plan. While that is still likely to be the case, PLR 2007 20023 found that such a transfer was considered a plan modificationm ie a busted SEPP. However, the IRS has still not rationally explained the thinking behind this ruling. Nor have they been following up on the thousands of such transfers made over the years to active SEPP plans.
At this point, there is no reason to panic and nothing the client can do now except to hope that the ruling is modified or dissipates without follow through by the IRS. Meanwhile, I would warn the client that 72t requirements are very rigid and that they should consult with you before initiating ANY further IRA transactions beyond those you have OKed. I wonder if she told the other agent or advisor that she had an active 72t account before the transfer was done………
Permalink Submitted by Rich Lorenzo on Thu, 2008-02-14 19:56
Do you think my client should continue her 72T as if nothing occurred? What about her 1099-R…Won’t that be a red flag to the IRS?
Permalink Submitted by Alan Spross on Thu, 2008-02-14 20:37
She should ignore the PLR at this point. There has been no evidence of the IRS following this up with the thousands of 72t plan taxpayers who have done transfers. PLRs technically only apply to the applicants anyway.
As for the 1099R, the bulk of IRA custodians no longer offer the exception coding, meaning that the bulk of 72t taxpayers must now file Form 5329. With that many additional 5329s being filed, it should no longer be considered as a red flag to the IRS notwithstanding the fact that getting the exception code (2 in Box 7) does provide some level of “insurance” against inquiries.