Change of 72t
I have a client that changed IRA companies during the 72t distribution period. The new company did not set this up as a 72t since the original account was set up after the law change.
I have been told that even though his income is being reported as a regular distribution that as long as he files a 5329? form then everything is fine and no penalties will be assessed.
Is anyone familiar with this type of scenerio by chance?
Permalink Submitted by Alan Spross on Tue, 2008-02-19 22:15
It is correct that fewer custodians are issuing their 1099R with the exception coding for substantially equal payments, and that forces taxpayers to claim the exception on Form 5329.
While the IRA custodian should be informed when a taxpayer is using an account for a 72t distribution, there is no requirement that they know as long as the amount distributed complies with the requirements.
I don’t follow your first paragraph though. The last major change was RR 2002-62, but since then there have only been a smattering of PLRs issued, none that address how or when an account is set up as far as I know. One of those rulings was 2007 20023 that busted a plan for doing a partial transfer to a new IRA, however I am not aware of custodians giving this much notice since the IRS still has not explained their rationale for the ruling.
Permalink Submitted by Jason Veinot on Wed, 2008-02-20 19:33
Im not sure of the exact rule. Something about a 72t set up after 2002 is not eligible to be moved to a new company as a 72t even if doing the same income amount. However, I’m finding (and hoping) that filing the 5329 should suffice and just looking for confirmation from some gurus in this area.
Permalink Submitted by Alan Spross on Wed, 2008-02-20 20:14
Yes, you should be OK with the 5329 attachment.
Apparently, what you heard was someone’s interpretation of the PLR as listed above. However, that PLR addressed a partial transfer, and there is no problem with total account transfers, nor has there been any follow up by the IRS even on partial transfers.
I think some firms are using this to intimidate taxpayers in order to retain assets, and that was going on long before PLR 2007 20023. And they can’t really use the 1099R as a threat either because almost all IRA custodians are coding the distributions as early now even though they have held the 72t account from Day 1. With the majority ot 72t taxpayers now filing a 5329, they no longer serve as a red flag to the IRS.
Permalink Submitted by Jason Veinot on Thu, 2008-02-21 15:52
Your comments have made me feel a bit better about things although I’m still crossing my fingers.
I just got off the phone with his accountant and she said she has had a few others this year (didn’t sound too happy about it) having to do 5329’s as well and its basically a crap shoot as to if the IRS will come back to assess penalties or not. Said at a minimum he probably would get a letter this summer telling him he owes penalties of a few thousand dollars.
I hope not ………………………………………………….