72T complication for investor and representative
Client wishes to change her investments.
Client currently receiving payments from a 72T at the rate of $400 per month. Collected 2400 so far this year. Can a lump sum of $2400 taken in lieu of monthly payments suffice as the balance and not hurt the agreement?
In subsequent years can $4800 be withdrawn once a year and even if coded as a premature distrubition (this investment company will not do and/or honor 72T but do allow withdrawals) because the 72T is enforce would it qualify as 72T continuation of existing agreement? Obviously the client is under age 59 1/2.
If that is not allowable, can the source of funds be split into two investments and the $400 per month and/or $4800 annual be withdrawn from one of the accounts and still not void and existing 72T arrangement?
Permalink Submitted by Alan Spross on Fri, 2010-07-23 19:40
The distribution pattern for the annual payment can be changed at anytime. The critical requirement here is that the exact $4800 figure is distributed each calendar year. Or course, the earlier in the year the distribution is taken, the more stress is placed on proper budgeting. Most IRA custodians will code the 1099R form with the early distribution code (1), and the taxpayer then adds Form 5329 to their return showing the proper 72t exception code of “02” on the form.
Investments within the IRA account can be changed at anytime, but partial transfers to new IRA accounts do pose a very small risk of busting the plan because the IRS has issued two adverse letter rulings on partial transfers (PLR 2007 20023). This is probably an aberration since the IRS never provided a rational explanation for it, but it is better to avoid partial transfers unless the benefits are significant. There is no problem with a total transfer where the original 72t IRA account is totally transferred to a new custodian.
$4800 annual distribution is very small for a 72t plan, so I assume there are other larger income sources here for living costs. Or perhaps this is only one of multiple 72t plans?
Permalink Submitted by Roy Williams on Fri, 2010-07-23 20:57
Thanks for the great information. Roy Williams