72T & Transfers
A client has an active 72T, but would like to process a partial transfer and send some of the account to an IRA at their credit union. Could this possibly disqualify the 72T? Or if the first IRA flattens, he would keep taking distributions, but from the second IRA and it would not be considered disqualified because his 1099-R’s would be consistent.
Permalink Submitted by Alan Spross on Fri, 2009-08-21 03:47
You are describing a situation that has been done thousands of times in the last decade with no problem whatsoever. The thinking was that the IRS allowed transfers to the same type of plan (IRA), but not to another type of retirement plan such as a 401k. However, two years ago the IRS issued letter ruling PLR 2007-20023 which busted an otherwise valid 72t plan simply for doing a partial transfer to another IRA. Requests for a clarifying explanation from the IRS were met with an explanation that was even more confusing. I guess this is what happens when the IRS fails to issue Regulations, as is the case for 72t plans. The basic ruling is RR 2002-62, but other than that, current guidelines have been formed by a series of PLRs, which we all know cannot be relied on, except in a few cases where the subject circumstances are almost identical to the letter ruling. Therefore, the currently accepted guidelines come with limited guarantees and are based on delayed reactions to IRS rulings.
As a result, there is a degree of risk in doing a partial transfer as opposed to a total transfer of the IRA. The risk is probably slim because at this point there has been only one more recent ruling (PLR 2009 25044) and in this one the taxpayer made another error by commingling a 72t IRA with a non 72t IRA. But the IRS said the problem was the transfer, not WHERE the transfer went. Go figure. Since there is a known small risk here, I would suggest not doing a partial transfer unless the reward outweighs the small risk. As an advisor, the best thing to do is to explain this to the client and get the go ahead from the client and probably a hold harmless in the event the IRS decides to select your client for the next surprise ruling.