72t Runout before 59.5

Submitted by [email protected] on Mon, 2015-06-29 14:45

Since 2007, I’ve have a living benefit variable annuity for part of my IRA monies. I have taken 72t payments since age 48. Currently I am 55. If for some reason the account runs out of money before I am 59.5, the annuitization feature kicks in and I will have guaranteed income for the rest of my life due to the living benefit.

My question is this: How does the new guaranteed income (most likely different from my 72T payments) affect my 72t program? I.E. will it be a bust and will I have to pay a 10% penalty back to my first draw?

The VA company is getting back to me on how the 1099 will be coded if this happens but I wanted to check here.

Thanks in advance for any help.

JG



Submitted by Alan - IRA critic on Mon, 2015-06-29 16:28

There is no IRS guidance addressing such a situation, and under RR 2002-62 there is no retroactive penalty if the 72t account (or accounts in a multiple account plan) runs dry. But if the payout changes other than the one time switch to the RMD method, the plan is busted. It is difficult to speculate on whether a PLR request making the case that the account ran dry and that should terminate the plan while disregarding the annuitized payments that continue.  Perhaps you should pursue changing the investments in the annuity to those most unlikely to run dry in any bear market in the next 4 years.

Submitted by [email protected] on Tue, 2015-06-30 12:47

Thanks for the reply. Changing the investment is not an option as the orginal deposit amount is still “in waiting” to be used for lifetime income. I wonder if the account does run dry, if the account number is then switched to another account number foe the annuity payments, if that would show the existing account terminated.The new account number would have the lifetime income payments based on annuity factors which is one of the ways to draw an IRA before 59.5. It would just have to stay the same for at least 5 years correct? It will anyway as it will never chang due to it being an annuity payemnt stream. Thaniks for any help.

Submitted by Alan - IRA critic on Tue, 2015-06-30 17:19

I have no idea how the IRS would view this. I doubt they would consider the account balance as 0, but that is necessary for a plan to end without penalty if the plan is not completed. Then the annuity payments would have to qualify as a new 72t plan using one of the 3 methods in RR 2002-62. Just any life annuity would not be acceptable since IRAs do not have a life annuity exception unless it is calculated exactly under one of the two fixed amount options (Amortization or annuitization). And if the IRS did not conisder the account to be drained, then the payment change would bust the plan. I don’t see how this account could be run dry in 7 years unless you started it in 2008, lost a large portion of it by 2009 and then did not maintain stock exposure while the markets recovered. Note that the calendar year you reach 59.5 does not require ANY distribution to be taken, so that could help prevent it from running dry near the end.

Submitted by [email protected] on Wed, 2015-07-01 18:57

I see and understand your points. There has to be someone who has “walked this path” before. After checking my notes, I started this portion of the money right near the peak of 2007 and that’s why the concern. I feel it may not make it 4 more years if we only grind higher. The allocation was balanced and thus all parts of it got hit in 2008-09 and only the stock side recovered to a great degree. Things may work out, but this situation beggs these questions as I feel others circling the drain would like to know what’s coming Besides Alan-iracritic, any other suggestions by members of this forum? Thanks to Alan and any others 🙂

Submitted by [email protected] on Thu, 2015-07-02 13:00

Bump….

Submitted by Alan - IRA critic on Thu, 2015-07-02 16:33

What you would need is a PLR which addresses the situation. Otherwise, even if someone who has encountered this issue comes forward, given the IRS inconsistency in dealing with 72t plans, the change in payments might have been overlooked or examiners might come up with different conclusions. But perhaps someone knows of a PLR.

Submitted by [email protected] on Thu, 2015-07-02 19:32

OK that sounds good. Does anyone know the procedure and approx cost of a PLR?

Submitted by Alan - IRA critic on Thu, 2015-07-02 19:57

The filing fee is around 10k and the tax attorney legal fees could be another 3-4 k. Although you could file, my intent was that we need to find out IF a PLR on topic has already been issued. I normally hear of some of these but not all, so perhaps someone else has heard of any recently issued PLRs on this subject. If so, such a PLR would provide a clue how the IRS would likely approach this situation.

Submitted by Bruce Steiner on Fri, 2015-07-03 00:07

  • The legal fees for a ruling request would probably be substantially more than the figure Alan suggested.  

 

  • Would you do anything different based on whether you received a favorable ruling?  If not, then why would you want to apply for a ruling?

Submitted by [email protected] on Mon, 2015-07-06 17:28

I see…the exisitance of a PLR ont his topic would be the best route….. Thanks….

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