Another 72t question
I have a client who was talked into moving their 401k from work into a variable annuity in order to take 72t distributions, and to use those distributions to fund a survivorship life insurance policy that they didnt need to begin with (he was sold). Anyways, here is the scenario and the question. They are quite unhappy with the variable annuity and all the extra costs for including the GMIB and the GMDB. These costs along with the recent market performance has caused the client to move all of the money inside of the annuity into cash. The annuity allows 10% surrender free withdraws a year, and it is cummalitive. Right now he can take out 40% of the value of the annuity, and is able to do a one time 1035 exchange to another annuity, say a fixed annuity. The question is, if he moves that 40% out, will it negatively effect the 72t calculation and cause tax consequences (under 59.5, so 10% as well) on his IRA. So, 60% of the value will stay where it is now in the variable annuity, but 40% would be 1035 exchanged to a fixed annuity. Will the 60% left in the VA, still satisfy his 72t requirements and avoid any negative consequences/tax consequences. Thanks for any help on this matter.
Permalink Submitted by Al Fry on Thu, 2008-10-30 18:30
Because of the recent market turbulace, most VA owners are very pleased that they paid extra for the Guarantees. A partial exchange of that magnitude would probably destroy those guarantees. I would tread lightly here, and make sure the client understands what he has, and what he would be losing. As for as transsferring part of a 72(t) SEPP, that is generally not recommended, as per 2002-62 and a PLR from 2007. Perhaps others can comment on that.
Permalink Submitted by Alan Spross on Thu, 2008-10-30 22:46
Attached is extensive data on PLR 2007 20023. Bill Stecker, an authority on 72t issues requested a General Information Letter from the IRS, but unfortuneately what he received provides little useful information. I think that the PLR is an aberration, as there has been no further evidence of the IRS busting other plans, and there have been thousands of partial transfers done in 72t plans over the years. Nonetheless, the risk of doing such a transfer is still greater because of the PLR, than prior to the PLR. It would be wise to make sure that the client makes his decision based on knowledge of the PLR and his own assessment of risk vrs reward.
http://72t.net/Articles/ArticleShow.aspx?WA=260