72t Transfer (trustee to trustee)
I have a potential client that has already initiated her 72t payments 2 years ago at age 58. She takes her payment annually in January. The current disposition of her qualified funds is mutual funds 100%. She was not aware of this and has almost zero risk tolerance. She wants to transfer the account into an annuity with another company. Her third annual payment is Jan 08.
Does she have the ability to transfer trustee to trustee after Jan without any negative results?
As long as the annual payment remains the same can the transfer be made? If so, are there any special IRS forms that need to be submitted?
Thanks ahead of time for anyone’s consideration on this post.
Permalink Submitted by Alan Spross on Fri, 2007-12-07 23:56
A total account direct transfer should have no negative affect on the 72t plan, although it does increase the risk of execution errors. PLR 2007 20023 was recently issued by the IRS busting a 72t plan for making partial transfers, but the consensus is that total transfers should not be affected by this still unexplained PLR.
Some of the issues to be considered:
1) If the current custodian is providing an exception code on the 1099R, this benefit may be lost with the new carrier. If so, the taxpayer must claim their own exception on Form 5329.
2) The new custodian may not understand that the new account is subject to Sec 72t SEPP distributions, and might levy a surrender charge for the distribution required by the 72t plan.
3) The ability to correct an execution error by rolling back distributions that were too large may be lost.
4) If she annuitizes the annuity for any reason prior to the modification date for the plan, it will bust the original plan.
Some custodians incorrectly threaten 72t participants by indicating that there plan will be busted by a transfer. While this is incorrect, and a transfer can be done, it does increase risks of an oversight, and I would recommend that the taxpayer get written acknowledment from the new custodian that they are aware of the plan and are NOT aware of any problems in meeting the distribution requirements of the plan.
Of course, there are countless ways to reduce risk without turning to an annuity, usually available in the existing IRA format.
Permalink Submitted by William Hobbs on Sat, 2007-12-08 00:09
Thanks Alan. That was very helpful and concurs with what I have researched thus far.
As for her risk, I agree with you on the various other ways to do it. In her case however she wants to completely eliminate it.