72t brokerage with VA paying switching clearing firms
Have the following situation.
IRA on a brokerage platform that allows ownership by the clearing firm of a VA inside an IRA brokerage account.
VA has living benefit turned on paying into brokerage IRA and the IRA is making the pay out of the 72t amount and doing the reporting. I’m good with this. (not sure why they turned on a living benefit inside an IRA brokerage with 72t)
B/D is changing clearing firms, to a firm that won’t take ownership of the VA inside of brokerage IRA. So the VA will have to be taken back by the IRA owner and held separately as an IRA with the VA company.
Because of circumstances outside the control of the IRA owner would we avoid a modification of the 72t?
If the VA with the living benefit has to continue to payout, then we have different IRA making the 72t payment even if by some coincidence it is the correct 72t payment.
I’m thinking we have modification. Looking for an opinion unless there is some precedence for this. Is this PLR situation? 🙁
Permalink Submitted by Alan Spross on Thu, 2011-07-28 21:59
If the actual amount distributed does not change, the 72t plan should be intact. That said, there was one notable case where the IRS busted a 72t plan due to a partial transfer of the IRA balance. This ruling (PLR 2007 20023) was never rationally explained by the IRS. There was another partial transfer problem also with other peculiarities. So we have two problems out of hundreds of thousands of such partial transfers that have never been questioned. That is pretty good odds. Full transfers are not a problem, but it appears that a full transfer here cannot be done without surrendering the VA.
While the odds of a problem are slim, they would be better if there was only one 1099R, but that does not look possible. More likely, in the year of the change there will be 3 1099R forms from the original IRA, the insurance company, and the new brokerage IRA.
I would suggest that the only action for the present year is to make absolutely sure that the total 1099R gross distributions exactly equal last years total. The custodian changes should also be done by direct transfer to eliminate rollover reporting and preserve the indirect rollover for potential error correction. If the 1099R totals are too high and the last distribution was taken in December, then the excess amount could be rolled back to the brokerage IRA allowing the 72t amount to be adjusted to the correct amount.
There should be no need to do anything further other than to save correspondence that documents why the participant had to change the IRA structure around in case the IRS inquires. A PLR costs $10,000 plus legal fees so that should be avoided except as a last resort.
Another thought – would it be possible for the BD to “sell” the account to another BD using the original platform so the current account could remain undisturbed?