72T Distribution

Submitted by Jennifer Williams on Wed, 2016-01-06 22:57

I have a new client who is currently 58, and has been taking $1400.00 per month (16,800) from her IRA, which has gone down in value, CMV $370k approximately. She would like to invest these funds more conservatively at this time, and I wanted to know if there is any way to modify her distribution to annually, then roll over remaining proceeds to an annuity.

Thank you,
Jennifer



Submitted by Alan - IRA critic on Wed, 2016-01-06 23:53

  • A 72t plan participant must only distribute the correct annual amount. The distribution pattern does not matter within the year or from year to year. Therefore, at any time she can take out the remainder of the annual distribution amount for 2016.
  • With respect to the rollover (best done by direct trustee transfer), the only answer available is that it is “probably” OK. However, the IRS has busted a couple 72t plans for doing a partial transfer, but not provided a sensible explanation why ( see PLR 2007 20023).  Two out of several thousands of plans is a remote chance of a problem, but client should be told of the potential for problems. It would be safer to complete the 2016 distribution, then transfer the ENTIRE remainder to an annuity. A total transfer has not be challenged by the IRS as long as the transfer is to the same type of plan (IRA). The new IRA will still be part of her 72t plan.
  • Safer yet would be to wait until the plan modification date arrives next year before doing the transfer. Since the plan would then be over, a partial transfer would definitely not be a problem.
  • I assume the annuity will not be annuitized and will continue to have a plan balance as long as the 72t plan is still in force.
  • If the client’s modification date is based on age 59.5 rather than being a 5 year plan, and will have completed 5 years of distributions by the end of 2016, there is NO requirement for a distribution in 2017. For 2017 she would have the option of no distribution, a full annual distribution, or monthly distributions ending in the month before the modification date of her plan.

Submitted by Lori Price on Thu, 2016-01-07 19:25

A new client stands to inherit a lot of money and her broker started a 72t last June.  She came to me and I couldn’t understand why – since she does have other resources to use for her $20,000 annual shortfall.  If she inherits a few million dollars next year it seems that she has to continue with these distributions for another 11 years.Please help if you know of any loopholes, it has only been about 7 months so far.Thanks

Submitted by Alan - IRA critic on Thu, 2016-01-07 21:43

She can just bust the plan when the inheritance materializes if she no longer wants the distributions. She will only owe the 10% penalty on the amount of distributions she has already taken, not on distributions she will not take. She might even qualify for certain other penalty exceptions for some of the amounts that have already been withdrawn if she amends those returns.

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