72T Change of Assets
Three years ago the client had $1,000,000 and wanted to start receiving income under 72T. He was 57 at the time. The broker (not me) used $850,000 of the money in the computation of the monthly income. The monthly income started out at $2,000 per month. (Note: That income has changed each years slightly based on the value of the account, the brokerage house is doing the adminitration.) He is three years into the payments, two more to go ($48,000). What the client wants to do is take all of his money away from the current brokerage house (less the $48,000) and buy some annuities, Reits, and managed money with another broker. He wants the current brokerage house to continue paying him the $2,000 per month from the $48,000 left behind to satisfy the income requirement with the 72T. Would this trigger a penalty by the IRS?
Permalink Submitted by Alan Spross on Fri, 2011-03-18 21:17
Probably not, but there have been at least two cases where the IRS busted a 72t plan for doing a partial transfer of the IRA. Most notable is the one in PLR 2007 20023.
A couple concerns here.
1) If client had a single IRA account and only used part of the balance to calculate the 72t distribution, the plan was invalid to begin with. If the broker used 850,000 for the initial balance, then the 850,000 needed to be the full balance in the IRA account. If client had 850k in one IRA and 150k in another IRA account, then that is all right.
2) What method was used, the RMD method? Since he started with only about 2.8% of the balance being distributed (24/850) and you mentioned the yearly value change, client must be using the RMD method. This is OK if done right, but is not the best method to use since it yields less per dollar of balance. A fixed dollar method generates around 5% of the account balance and is only done once.
3) Which brings us back to the remaining years. If the RMD method is being used, there is no reason to assume that the remaining annual distributions based on the value of both IRA accounts will remain the same.
The above issues need to be clarified to make sure the current plan is valid. Client should have a calculation documentation sheet showing what figures were used to generate the 72t payment initially, and if the RMD method is used, each annual calculation thereafter. I have a concern that this plan may already have been compromised based on your description of the situation, and you need to check this out. The IRS is not very good at notifying taxpayers promptly if their plan is no good. And the potential penalties build up year after year.