Broker put rollover funds into existing 72t account

Submitted by Ann Pham on Mon, 2014-06-02 14:08

This happened to a friend a few years ago, and she just realized it. She was aware that funds were not to be added to the 72t account. The broker “accidentally” added her rollover to the 72t account. Is her 72t plan busted? Or is there a way to fix the problem, since she did not authorize the addition? In fact, she thought she would have another separate IRA. The 72t account has been in place for 10 years, and her penalties and interest will be hefty if there’s no fix.



Submitted by Alan - IRA critic on Mon, 2014-06-02 15:13

This is the type of executory plan error that the IRS may allow to be reversed without busting the plan, but a PLR request must be filed.     http://www.72t.net/Articles/ArticleShow.aspx?WA=870e2089-7523-49e3-8252-b2e2df8cf6ae

Submitted by Ann Pham on Mon, 2014-06-02 20:02

She took extra distributions thinking they were from a separate IRA not realizing they were from the 72t account where the funds had been commingled. She received 1099s for the “extra” coded 1 and paid the 10% penalty for the respective taxable years.   She only realized that there was a mistake when she received a 2013 1099 that didn’t have a code 1 and her tax preparer asked why. Couldn’t she just have the broker (whom she is leaving after this fiasco) remove the rollover that should have been put in a separate IRA? Does she have to go through the PLR process? I’ve read that it could be quite costly. 

Submitted by Alan - IRA critic on Mon, 2014-06-02 20:56

  • I don’t understand the sequence of events, now that the problem involves distributions as well as contributions. When you have a 72t plan, the first dollars distributed are considered 72t distributions and cannot be rolled over to any type of plan. But after the 72t amount has already been distributed in a given year, additional amounts that are distributed can be rolled back to the same IRA within 60 days because these distributions are NOT 72t distributions. Sounds like there is more than one year this happened, but I still need to know exactly what the sequence was of distributions and rollbacks to determine if there is any easier way to fix this, unlikely as this appears at this point.
  • Most custodians code all distributions with a 1, as they cannot handle all the variables in a 72t plan. Are all the 1099R forms coded 1?

Submitted by Ann Pham on Tue, 2014-06-03 04:20

Half of the amount in a 401k account was rolled over into an IRA for the purpose of a 72t account. From 2003-2009, she took substantially equal payments and received 1099s coded 2. In 2009 she rolled over the rest of her 401k to what she thought would be another IRA. From 2010-2013, she took extra distributions in addition to her SEPs for her son’s college tuition, helping him purchase his vehicle and first home, etc. The 1099s she received for these distributions for 2010-2011 were coded 1 and she paid the 10% penalty. She finally figured out her funds were combined when she received her 2013 1099 with code 2, none with code 1.  If her extra distributions had been from another IRA, does that make a difference? Or any distribution would have busted the plan?

Submitted by Alan - IRA critic on Tue, 2014-06-03 16:06

  • If the rest of the 401k rollover had gone into a different IRA account than the one used for the SEPP, distributions from that IRA would not have affected the SEPP. They would have been coded 1, but the higher education expenses shown on a 5329 would waive the penalty for that much of the distribution.
  • It sounds like the custodian has not been coding the distributions correctly and also is not consistent from year to year. The 2 coding should have stopped as soon as the 401k rollover went into the SEPP account because there can be no contributions to a SEPP account except for certain rollovers from the same or other SEPP accounts after the annual distribution had been completed.
  • There was an IRS PLR (Benz vs Commissioner) under which the IRS allowed additional distributions from a SEPP account over and above the SEPP amount for higher eduucation purposes. But PLRs are not binding and more importantly, it appears that she took out more than just higher education expenses. These additional distributions would eliminate consideration based on Benz, moreover the SEPP was first busted when the second rollover went into the account, so distributions after that are immaterial.
  • Perhaps that rollover could have been reversed if the error had been addressed immediately. Under a SEPP there must be constant vigilance that every transaction is done correctly.
  • It appears that her best option now would be a legal settlement with the broker that set off this string of events. There does not appear to be sufficient chance of success to pay the costs of her own PLR ruling which would run about 10k plus legal costs. If she proceeds against the broker, she should first investigate her documentation. For example, is there any doubt that the broker knew that there was a SEPP in process when the rollover was ordered. If the broker has better documentation than she does to defend his position, her chances are not good.

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