72(t) Account Transfer
I have a new client who has a 72(t) brokerage account that is invested in mutual funds. The client has been taking a monthly withdrawal for three years with three years left to get her to age 59 1/2.
My questions are:
(1) Can we transfer and/or liquidate the assets in the current brokerage account and transfer the proceeds to a new 72(t) brokerage account at another broker/dealer?
(2) If this can be done, what type of IRS filings are needed to prevent the client from violating the 72(t) agreement?
Thank you,
Captain Harry
Permalink Submitted by Alan Spross on Tue, 2008-03-18 19:52
Yes, a total direct transfer should not present a problem, other than some added mathematical checking to be absolutely sure the correct annual amount is distributed for the year despite the change of custodians.
You may have heard of PLR 2007 20023 last year where the IRS busted a 72t for making a partial transfer to a new IRA account with no prior balance. While this ruling has still not been rationally explained, there has been no follow up with the thousands of others who have done partial transfers, so even they are probably OK. In this case, you are contemplating a total transfer of the account, a concept that has not yet been questioned at all.
One issue is the 1099R distribution coding in Box 7. Most custodians are no longer offering the exception code and that forces the taxpayer to claim the exception from penalty on Form 5329. The transfer will likely end the exception coding if the client has been receiving it in the past, but since so many are now using the 5329 form, having to use it for the first time should not materially increase the client’s risk of inquiry into the 72t. In summary, OK for the full transfer, but don’t do it near the end of the year where there would be an added risk of uncorrected incomplete distributions. While the new custodian should be told that the account is a 72t, it is not a firm requirement that the custodian even knows about the 72t plan.
2) The 5329 to claim the exception is the only form, and client may already be filing this. Other than that, just be extra sure the correct annual amount is taken out, and perhaps this is a good time to be sure that the initial plan calculation logistics are clearly documented in the event there ever is a question.