multiple IRA’s for 72t election

Submitted by [email protected] on Thu, 2010-04-15 13:24

Potential 50 year old client is going through a divorce and will likely receive a decent lump sum, in the form of an existing annuity, to support her. She will need an immediate income stream from this lump sum to support her while she tries to find gainful employment. Considering rolling the annuity into multiple IRA’s then establishing 72T income stream from each. I am concerned that, due to her young age, that at some point she may have to access a portion of these funds in an emergency, busting the 72T SEPP payment schedule and causing a tax trap. If we utilize multiple IRA’s with 72T election, will this limit the tax damage caused by accessing only one of them beyond the SEPP payment arrangement to that IRA only?

If this is feasible, are there any limits on the number of IRA’s that could be used to employ this strategy.

Thanks for your help!

Chazz56



Submitted by Alan Spross on Thu, 2010-04-15 19:45

There are no limits to the amount of separate 72t plans a taxpayer can have, whether started at the same time or different times. Each plan is treated as a totally separate plan and busting a plan will not affect any of the other plans.

If there will be a QDRO filed for a qualified retirement plan, and such plan offers flexible distribution options, the QDRO exception will waive the penalty and could help to avoid the rigidity of a 72t plan. However, the QDRO penalty exception does NOT apply to IRA accounts, so if the assets are all in IRAs, then a 72t plan will probably be needed.

If so, the usual procedure is to partition the IRAs by direct trustee transfer into an IRA with the amount needed to fund the initial 72t plan and another IRA to remain outside the plan. The IRA outside the plan can be tapped for expenses that may have their own penalty exception such as higher education, certain medical costs etc. This IRA can also be used for emergency needs subject to penalty, or be partitioned again into two IRAs, the first to be used for a second 72t plan and the other to be the new emergency fund IRA. In this manner, the plans would be started a couple years apart rather than at the same time.

Since there would be alot of moving parts, extra caution is needed in administering this strategy.



Submitted by [email protected] on Thu, 2010-04-15 21:01

Thank you as always for your excellent advice.

Just one followup question regarding the penalty free QDRO distribution from a qualified plan. My understanding is that this penalty free exception is a one shot deal based on the initial distribution as provided for in the QDRO and not a series of future payments, equal or discretionary. Is this correct?

Chazz56



Submitted by Alan Spross on Thu, 2010-04-15 22:55

No. The exception applies to any distributions from the plan per the order. Note (C) below in the tax code definition of a QDRO:

>>>>>>>>>>>>>>>>>
(2) Order must clearly specify certain facts
A domestic relations order meets the requirements of this paragraph only if such order clearly specifies –
(A) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,
(B) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,
(C) the number of payments or period to which such order applies, and
(D) each plan to which such order applies.
>>>>>>>>>>>>>>>>



Submitted by [email protected] on Mon, 2010-04-19 14:49

I received additional information that the annuity in question is held inside her, soon to be ex, spouses IRA. I wanted to confirm that she is able to, at least, access a one time distribution from this IRA/annuity in accordance with a QDRO without facing an early withdrawal penalty. Is that accurate?

Thanks again!
chazz56



Submitted by mk foss on Mon, 2010-04-19 21:51

The QDRO provisions do not apply to IRAs. If she receives an IRA as a result of a divorce, withdrawals are subject to the 10% penalty as long as she is under 59.5. There would be no penalty in transferring the ex-husband’s IRA to her name – the internal revenue code allows that; but she would need to use 72t substntailly equal payments or some other exception to the 10% penalty for withdrawals.



Submitted by Wallace Smith on Mon, 2010-06-14 22:44

I have the same question, but it pertains to 72(q) distributions from NQ annuities. Are the rules for 72(t) and 72(q) the same? Also have a client for whom we want to compartmentalize the risk of “busting” a large 72(q) SEPP down the road by instead setting up a series or ladder of smaller FIAs with 72(q) coming off of them.

Thanks



Submitted by Alan Spross on Tue, 2010-06-15 00:10

Short answer is Yes, SEPP payments under 72q are handled the same as if they were under 72t.

Long answer in IRS Notice:
http://www.irs.gov/irb/2004-09_IRB/ar09.html



Submitted by Wallace Smith on Tue, 2010-06-15 00:32

Does the “greater of five years or until 59 1/2” rule apply to 72(q) distributions? In a quick read of the “long answer,” SEPP for the lifetime of the contract owner popped out.”



Submitted by Alan Spross on Tue, 2010-06-15 00:59

Yes, the greater of 5 years or 59.5 still applies. The SEPP calculation is still based on life expectancy calculations, but the plan is allowed to terminate on the later of those two dates.

Of course, if any of these accounts are annuitized in lieu of a SEPP calculation, the penalty will also be waived, but then the distributions must continue for life or joint life expectancies. But this is a terrible time to annuitize what with record law interest rates and the certianty of much higher rates in the future.



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