ESTABLISHED 72T MOVING PART OF THE FUNDS TO AN IRA ANNUITY

Submitted by JAMES SHOMO on Tue, 2017-03-28 13:53

A CLIENT HAS AN ESTABLISHED 72T PLAN (SET UP FIVE YEARS AGO) WITH AN INSTITUTIONAL BROKERAGE ACCOUNT WHICH SENDS HER ANNUALLY $20,000.00

SHE IS UNHAPPY WITH THE CURRENT CUSTODIAN.

SHE IS CURRENTLY 55 YEARS OLD AND IS MOVING PART OF THE IRA TO AN ANNUITY IRA AT ANOTHER CUSTODIAN WHILE LEAVING (MORE THAN ENOUGH) THE NEXT 5 YEARS ANNUAL PAYMENTS WITH THE ORIGINAL BROKERAGE TO CONTINUE THE PAYMENTS UNTIL SHE REACHES AGE 59.5.

CAN THIS BE DONE AND IF NOT, CAN THE PROCESS BE REVERSED

WHAT DO YOU SUGGEST? SHE HAS NOT RECEIVED THE ANNUITY POLICY YET BUT THE FUNDS WERE TRANSFERRED.

OBVIOUSLY, SHE DOES NOT WANT TO PAY THE PENALTY FOR THE PREVIOUS PAYMENTS IF THIS WILL BREAK THE PLAN.

THANK YOU.



Submitted by Alan - IRA critic on Tue, 2017-03-28 15:47

  • It will likely not be a problem, but you should know that the IRS has busted 72t plans for partial transfers that creates an additional IRA account to the plan since part of the initial IRA remains. Most of these partial transfers were to purchase an IRA annuity. The first such busted plan resulted from PLR 2007-20023, then 2 years later there was 2009-25044. The IRS never provided a lucid explanation for their rationale in busting these plans.  However, keep in mind that thousands of partial transfers have been done over this period, and only 2 plans were busted. The odds are pretty good in her favor, but now that this has been done she should avoid calling any further attention to her tax return than absolutely necessary.
  • Hopefully, the funds were moved by non reportable transfer rather than by 60 day rollover. A 60 day rollover generates a 1099R and a 5498 and must be reported on line 15 of Form 1040, so this is a red flag.  She should also continue to take the entire 72t plan distribution from the original IRA account so that no 1099R is issued for the annuity. The annuity should NOT be annuitized until after the 72t plan ends.

 

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