72t question
If someone is on a 72t distribution from ira #1, and they have another ira #2 (not using 72t), can they do an IRA direct transfer from #2 to #1 without disrupting the 72t rules?
Thanks in advance.
If someone is on a 72t distribution from ira #1, and they have another ira #2 (not using 72t), can they do an IRA direct transfer from #2 to #1 without disrupting the 72t rules?
Thanks in advance.
Permalink Submitted by Alan Spross on Mon, 2008-06-02 21:15
No, that would bust the 72t plan. This is true regardless of whether the funds move by rollover or direct transfer.
If they need more money, they could take a distribution from #2 that would be subject to early withdrawal, but at least it would not result in retroactive penalties on the 72t plan IRA account. That is one of the benefits of having an “emergency fund” IRA that is not part of the 72t plan.
In addition, some distributions from the IRA outside the plan might qualify for an exception of their own, eg. higher education, first home purchase etc.
Finally, if the original 72t plan was set up using the account balances of both IRAs, then both of them are already part of the plan even if the annual distribution is being taken from only one of the IRA accounts. In that case, funds can move between the two IRA accounts without busting the plan, since no new contributions are being made to any IRA with funds that were not part of the original 72t plan.
Permalink Submitted by James Brogan on Mon, 2008-06-02 21:36
They do not need more income. I am wanting to re-construct the portfolios (due largely to the changing economic market the past twelve months), and would rather the monies come from the other IRA, but it was NOT included in the 72t calculation. In other words, I would rather the client take the income from the portfolio in the other IRA, but it looks like I cannot accomplish it at this point. One of the iras is a no-load brokerage account, and the other is a fixed deferred annuity, so it’s not as simple as just changing the investment mixes within each ira.
I did not think I could solve this dilemma by using ira #2 in any way, but wanted to make sure I exhausted every option.
Am I missing anything?
Thanks for your help.
Permalink Submitted by Alan Spross on Mon, 2008-06-02 23:44
No. You would have to redeem the investments in each IRA and re purchase so that the 72t continued from the same IRA account number. I understand this could result in fees, surrender charges and possibly other penalties.
You could also leave the non 72t IRA alone and directly transfer the 72t account to a new IRA custodian and continue the 72t from the new custodian’s IRA. Form 5328 would probably be needed to report the 72t exception if this is not already needed. This might be preferable to the above, but I do not know which IRA contains the annuity.
They could also start a second independent 72t from the second IRA, but that would be non productive unless they actually needed the added income. Finally, they could elect the one time switch to the RMD method from the current 72t account and that would reduce the distribution by a considerable percentage. They could then start the second 72t plan from the current non 72t IRA account. That might work depending on the relative account balances, but it would also start a new 5 year period for the second plan.
Quite possible all these potential solutions are worse than staying put. Generally, it is not worth the risk to mess with these plans unless the benefits are compelling. Too many moving parts invites IRS inquiry and also increases the chance of execution error.