72t
client is currently taking a 72t distribution. he wants to rollover a portion of his IRA(from which 72t is coming from) to another IRA. he will continue his 72t dist. this rollover will cause a 1099 form to be issued, as a premature distribution. even though this will be a non-taxable event, the fact that a 1099 form will be issued, will this cause his 72t distribution for the past 3 years to be subjected to the 10% penalty tax?
I know a trustee to trustee transfer is the best option, but in this case, it is time consuming, and a rollover is the fastest option.
Permalink Submitted by Alan Spross on Tue, 2008-07-08 19:50
While a penalty is very unlikely, there is one unsettling IRA ruling made last year in PLR 2007 20023, where the IRS busted a 72t for doing exactly what you are asking about. This ruling has not resulted in problems for the thousands of others who have made partial transfers or rollovers and the IRS has not explained it rationally, so the ruling is likely an aberration. Still, you should be aware that there IS some degree of risk here. More info is posted on this site under PLRs of interest. Note that this risk exists whether the change is done by rollover or direct transfer.
Client’s “SEPP universe” would then consist of both IRA accounts and he would need to take the annual distribution from one or both of these accounts. This rollover would require a rollover reporting on line 15 of his 1040 and surely would also require a 5329 to claim the 72t exception when the custodian shows an “early distribution” code on your 1099R.
One other risk here is using up his one permitted rollover over a 12 month period. If the rollover is used up, another rollover cannot be done to correct a distribution error for 12 months and a valuable safety valve is lost for that period. Therefore, if the change is made, as you indicated, it is best to do it by direct transfer. These do not take much time with most custodians, but there are undoubtedly some that do not handle them correctly.