IRS Pub 590B & Ruling 2002-62

Submitted by william whitfield on Sat, 2016-01-09 07:51

My retired age 55 daughter is withdrawing a 72t compliant SEPP (fixed amortization single life) and is having difficulty finding an unequivocal answer to her question. Can she rollover a portion of her IRA to another IRA custodian without invoking the beyond-tolerable wrath of the IRS involving retroactive imposition of 10% penalties…plus interest?

Subject references I’ve been told by some nay-sayers would clearly answer the question, but IMO don’t quite rise to that level. Here are the relevant words in the ruling:

“(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments [SEPP] that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59½, the exception to the 10-percent tax does not apply, and the taxpayer’s tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.”

So specifically, since her SEPP is a fixed and funded amount which won’t be recalculated during its required period, would or would not a partial rollover to another IRA custodian during that period be considered as a ‘modification’ of her series of payments?

From the words alone, I’m at a loss to see how they could be interpreted as being affected, much less prohibited by the partial rollover scenario, but I fear it may take another IRS ruling to clarify this one in order to safely and correctly answer the question. However, having just discovered this forum, I’m interested as to whether participants here will agree with my read…or if not, be able to explain how or where I’m misinterpreting the ruling.



Submitted by Alan - IRA critic on Sat, 2016-01-09 18:07

There is no solid answer to your question, it is just a question of “odds” which greatly favor the taxpayer doing a partial rollover. 72t plan rules developed over a couple decades of PLRs with Notice 2002-62 being the primary source of IRS interpretation. Beyond that, you can only look at the IRS letter rulings and how they have administered 72t plans over the years. Notice 2002-62 indicates that a transfer to another retirement plan will bust the SEPP, but this has generally been interpreted to mean a different type of retirement plan. For example, you could not roll an IRA SEPP into a 401k plan and continue the plan. Over the years the IRS has allowed thousands of partial transfers of a SEPP balance between IRAs and the IRS Regs also allow a SEPP TIRA plan to be converted to a Roth IRA with the SEPP continued from the Roth. Then the IRS shocked everyone with PLR 2007-20023 in which they busted a SEPP plan for a partial transfer between TIRA accounts. Efforts to glean an explanation from the IRS following this ruling produced no rational explanation. Another slightly different PLR along these same lines was issued 2 years later (PLR 2009-25044). Meanwhile, thousands more partial transfers were done without any consequences. Accordingly, the odds are very much in favor of a taxpayer’s partial transfer skating through, particularly if they do not take SEPP distributions from the new IRA account. However, if the SEPP Distribution amount is large and the plan is nearing it’s modification date in the next couple years, why take the gamble?   NOTE: No know issues with a total transfer to a new IRA, only partial transfers were subject to these letter rulings.

Submitted by william whitfield on Sun, 2016-01-10 03:36

Thank you, Alan, for having the patience to bring this newbie up to speed on an obviously lengthly topic-related run this and related 72t topics have had already…with sadly apparently practically all discussions I finally got around to checking basically saying the same thing…nothing but muddy waters we’re wading into…and no clear answer!Unfortunately, and despite the lengthy odds against running afoul of an IRS’ fuzzy headed and meritless adverse finding, there’s no way I could advise my DD to chance that risk given the severities of the penalties involved if she were to lose the gamble. The inadequacy of the IRS to deal with this issue clearly and with understandable rationale is absolutely apalling! One has to wonder why all the experts among us don’t put a stop to this by passing the hat and filing a collective lawsuit to challenge their really ‘JV’ rulings in court.  Of course doing that would risk being tossed out for lack of “standing” or some such idiotic technicality that avoids addressing the merits of a legitimate issue.  Oh well, so what’s new, eh?  Thanks again.

Submitted by Bruce Steiner on Sun, 2016-01-10 23:25

  • You can’t file a lawsuit unless there’s an actual case where the IRS wants additional tax from a taxpayer or a taxpayer files a refund claim that the IRS denies (or doesn’t act on for at least six months).

 

  • She could apply for her own private letter ruling, though between the IRS user fees and the legal fees there would have to be a substantial amount involved for it to make sense.

 

  • In this case, she could simply keep the entire IRA where it is, or move the entire IRA to the new custodian if her expenses will be less at the new one.

 

  • Most IRA owners who want to take substantially equal periodic payments before age 59 1/2 aren’t very well off financially (or else they wouldn’t need to take distributions from their IRAs before age 59 1/2).  So it’s usually not practical for them to apply for a ruling.

 

  • There are, of course, execptions to the above, where someone with substantial assets wants to take distributions before age 59 1/2.  I’ve had three such cases.  One was someone who got divorced, and in the divorce, instead of dividing each type of asset, he got all of the retirement benefits and very little else, and his wife got a large amount of nonretirement assets.  So he needed to take distributions from his IRA before age 59 1/2.  The other two were IRA owners with extremely large IRAs, and they wanted to make their income more level rather than living on a very modest (relative to their assets) income until age 59 1/2.

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