Partial IRA transfer on existing 72t IRA
I have a client who has been taking distributions under 72t for the better part of a decade and has another 3 years to go before she’s 59 1/2. She would like to do a partial IRA transfer, retaining enough assets in the original 72t IRA to satisfy the balance of the required distributions while moving the surplus to the new IRA. She would use both the old and new IRA assets in aggregate for the calculation in determining the distribution amount. I know if she had done the “split” prior to starting the 72t distributions she could have elected to aggregate both for calculating the required withdrawals. Does this same logic apply post 72t commencement, or would this be considered a material change to the original IRA and bust the whole thing?
Permalink Submitted by Alan Spross on Fri, 2011-02-18 02:33
Before getting to your question, most 72t plans use a fixed dollar distribution per the amortization or annuitization methods since these methods generate much higher distributions than the RMD method. Under these fixed dollar methods, there is no further calculations unless the taxpayer is making the one time switch to the RMD method. Therefore, your comment regarding calculation in determining the distribution amount brings these conditions into question. The partial transfer would not change the initial calculation unless the client is using the RMD method.
With respect to the transfer to a new IRA account, it should not cause a problem. That said, the IRS HAS BUSTED a couple plans for what they call disallowed partial transfers. The most notable of those is described in PLR 2007 20023. But to put this into perspective, the IRS has busted a couple plans, have never adequately explained their reasons for doing so, and tens of thousands of other taxpayer partial transfers have sailed through without a problem. The risk is therefore miniscule compared to the other ways taxpayers bust plans, but needs to be mentioned nonetheless.
Doing the transfer by direct TT trustee transfer rather than indirect rollover reduces the 1099R paperwork that could lead to a question, and therefore direct transfer is recommended if the client proceeds with this partial transfer. Once transferred, taking the 72t distributions from the original IRA only also eliminates multiple 1099R forms although aggregation of accounts itself is permissible.
Permalink Submitted by Scott Jensen on Fri, 2011-02-18 17:07
Thanks for your input. She is currently under an amortization payout, but was also contemplating using her one time switch to the RMD method to potentially reduce her distribution since she really doesn’t need it anymore. If she were to switch to the RMD method after doing the partial TTTT, using both the old and new IRAs to determine the balance for the the RMD calc. would she be in trouble? Or should she just look at only one or the other – splitting into two while maintaining the amortization payout or maintaining one while changing to the RMD calc.?
Permalink Submitted by Alan Spross on Fri, 2011-02-18 20:35
There would not be any difference in making the transfer before or after the one time switch. The largest exposure here is just doing the RMD calculation correctly by choosing the desired table and divisor. SInce she apparently wants to reduce 72t distributions to preserve IRA assets, she should choose the table with the largest divisor out of the 3 available tables and that will produce the lowest RMD distribution. She is not bound by the fact that she probably used an individual calculation to determine the amortization method amount. I suppose that the change in distribution invites added IRS scrutiny and therefore the IRS would also notice the partial transfer, but the transfer risk is still negligible. Here is a link to info on the RMD calculation- scroll down to “Methods”:
http://www.72t.net/72t/IRS/Revenue/Ruling/2002-62
Another way to preserve assets is to not take ANY distribution in the calendar year she turns 59.5. She can do this because she has already taken far more than the 60 month minimum.