Two IRA accounts used to Calculate 72t
We have two IRA accounts that are being used to calcualte the 72t distribution and are looking to use on account for the distriution to come out of. Is this inline with the IRS guidlines? The vendor coding the distribution as early since only the once account is held their and the amount even though is allowed via the 72t calculation as a whold, it is above the amount the one account would produce. Any thoughts?
Permalink Submitted by Alan Spross on Thu, 2012-01-05 20:52
More than one account can be used as part of a 72t plan, ie the total amount in all the accounts is the initial 72t plan balance on which the annual distribution is calculated. But the actual 72t distributions can be taken from one account or from all the accounts in any combination as long as the total annual distribution is correct.
Most IRA custodians today no longer “underwrite” the accuracy of 72t plan assumptions and distributions because the do not want the liability. As this case illustrates, one custodian may not even know about what is being done with respect to the 72t plan with other custodians. Therefore, most custodians code all distributions with Code 1 (early) on the 1099R. This is so commonplace even with single IRA plans that it does not raise any red flags with the IRS. The taxpayer simply completes Form 5329 each year to change the 1099R Box 7 code from 1 to exception code “02”.
In this case the taxpayer must always remember that BOTH IRA accounts are part of the 72t plan, and therefore neither account can receive a contribution or distribute any amount that is not part of the 72t amount. It is all right to transfer funds between the two accounts, but safer to not do partial transfers, just full transfers.
Permalink Submitted by Michael Ellison on Fri, 2012-01-06 13:04
Thanks Alan! I appreciate you taking the time to reply.