72t
I have a client that was taking 72 t distributions for the past 5 years. She is currently 57 years old. This past year I combined the two 72 t IRA accounts into one account. I then transferred a portion of the 72 t IRA into two IRA annuities latter in the year. My custodian has coded the clients last year distributions as a code 1 which indicates the client will need to pay a penalty tax on the 72 t distribution. The custodian is saying that the transfers to and from the 72 t IRA have disqualified the plan and any distributions are subject to penalty tax. I hope they are misinterpreting the code! Please let me know if they are correct and how I can help resolve the problem.
Permalink Submitted by Alan Spross on Wed, 2009-04-01 22:44
Almost all IRA custodians have abandoned the practice of underwriting 72t plans and therefore code these distributions with a “1”. The taxpayer then attaches a 5329 to his return claiming that exception “02” applies. However, this custodian seems to be taking the position that they know the plan does not qualify rather than the position that they do not know either way.
Transfers of 72t plan IRA accounts to other IRA accounts do not bust the plans, as long as the transfer is to a new IRA account that holds no balance. This client’s 72t plan is apparently now composed of 3 IRA accounts, and she can take her annual distribution in any combination from the 3 acccounts. That said, they could be referring to PLR 2007 20023 in which the IRS DID actually bust a plan for doing a partial transfer. This ruling is considered an aberration at this point because the IRS has not been able to explain it, has not busted other partial transfers of which there are many thousands in existence, and have not followed up on this one in any meaningful way. Therefore, you can conclude that unless there has been some other executory error made in the plan, that the mere transfer to new IRA account has NOT invalidated her plan. Therefore, their comments can be ignored and she should file a 5329 for those 1099R forms that are coded as early.
Permalink Submitted by Gregory Bowser on Thu, 2009-04-02 14:45
Thank you very much for your reply. You have confirmed my understanding, but was afraid that maybe I was unaware of a new change. This helps put my mind at ease. Thanks