Transfering a 72T in an annuity to a new custodian
I have a client that has two IRA accounts both invested in annuities at different insurance companies and both using 72T for distributions. We are looking to get him out of the annuities and consolidate the two accounts into a single IRA at a new custodian. We plan to continue the regular 72T scheduled payments, but there was concern that this move would constitute a “material change” in the account and therefore break the 72T rules. The IRS was no help and we need to know if he will face the 10% penalty on all distributions to date if we move him to a new custodian and get him out of the annuities.
Permalink Submitted by Alan - IRA critic on Wed, 2014-11-12 20:36
Are these two independent 72t plans started at different times or one plan that incorporates two separate IRA accounts? It is rare, but also possible to have two plans using different accounts, but started the same month. Would also need to confirm that there are no other IRA accounts that were not mentioned, but used as part of either of these plans. Obviously, if there is more than one 72t plan in place, they could not be consolidated in a single IRA account, but if there is just one plan (ie one initial calculation), then they could be consolidated. The IRS has busted 72t plans a couple times, but those were partial transfers, not total transfers. I am not aware of the IRS ever defining a partial transfer for these purposes other than the obvious taking part of an IRA and splitting it off into a second account part of a single plan. Many consider the PLRs that busted the two plans to be aberrations, since thousands of other plans were left intact, but it is vital to know the details of the plan(s)? the client currently maintains.
Permalink Submitted by Taylor Detchon on Wed, 2014-11-12 21:15
He actually has three IRA’s: one is invested in an annuity at sun america and has a 72t, a seperate one is in a different account also in an annuity at a different insurance company that also has a 72t that was started at the same month. the third IRA is “normal” and held in a seperate account and has no 72t. We are now going to keep all three in seperate accounts but move them into a new custodian like ML. Do you know of any issues surrendering the annuities and moving these accounts to a new custodian while continuing the scheduled payments? Would this move cause the IRS to bust the 72T’s?
Permalink Submitted by Alan - IRA critic on Thu, 2014-11-13 00:08
Ok, so the 72t plans are calculated separately, meaning they are independent plans each calculated using the initial balance of a single IRA Annuity account, even though the plans began the same month. Therefore, each IRA can be transferred by direct trustee transfer to new IRA accounts. No consolidation of these accounts is possible since the plans were separate and of course the 3rd IRA is not part of a 72t. The best timing would be to complete the annual 72t distributions for 2014 from each of the IRA annuities and then initiate a direct transfer no later than a month from now so everything is completed in 2014. Then the 72t distributions can be started up from the new IRA accounts in 2015. These will not be partial transfers, but a total transfer of each 72t plan IRA, and if done correctly will NOT bust the 72t plans. But detailed documentation should be retained just in case the IRA inquires. That documentation should include how the original 72t calculations were figured including initial account balance, date of first distribution, interest rate used and age used. Basically, the same distributions would just be continued from the new IRA accounts. I assume the client is already filing a 5329 to report the 72t plan penalty exception since the 1099R forms are probably showing code 1 (early). That pattern will continue until the plans reach their termination date.