How does 72T Affect an Individual’s ability to Roll Over his IRA into a Company PSP (Profit Sharing Plan) to buy Life Insurance
Client age 50 w/ at least $750k in an IRA accumulated over last 15 yrs has been given the opportunity by his employer to roll all of it into the Company PSP that will purchase a max funded 5 yr pay Life Insurance policy on his life. In the 6th yr, he will take an in kind distribution of the policy (a taxable event) & pay a one time tax based on the calculated PERC value of the policy so that thereafter, the policy is owned by him so he can access via loans the CV on a tax free basis for retirement. In other words, an overall excellent exit strategy from his IRA.
Only one problem, from that IRA is a 72T annual distribution that must continue to occur until he is at least age 59.5! Therefore how can he take advantage of this opportunity from his employer & still comply w/ the rules for the 72T IRA distribution to continue for 5 yrs or to age 59.5 whichever is longer?
Permalink Submitted by Nathan Kastner on Wed, 2018-12-05 19:01
This life insurance scheme is more commonly referred to as a “pension rescue” and the PERC value and Interpolated Terminal Reserve value calculations were intentionally implemented by the IRS as a painful and costly way to discourage EXACTLY what your client is suggesting. Have you been told what that PERC value is estimated to be at the time of distribution? PERC is “premiums, earnings, and reasonable charges”. It doesn’t sound like that number is going to be small. What if it’s $500k or more? Is your client really going to (intentionally) recognize $500k of income in a single year, just so that he doesn’t have to realize $750k of income stretched over (very likely) decades? Welcome to the highest tax bracket! That math doesn’t even remotely begin to work out. Are you the one recommending this life insurance, or just advising the client? As for your 72t question, it too creates problems. Rev Notice 89-25 and Ruling 2002-62 state that you are not allowed to change the balance of an account subject to 72t. That is a little ambiguous but is widely accepted to mean that you cannot make contributions or roll money INTO that account. It also is understood to mean that the only distributions allowed are for 72t. But… is a rollover considered a distribution? The bigger problem is that 2002-62 states that a taxpayer is prohibited from making a “nontaxable transfer of a portion of the account balance into another retirement plan”. So, based on my cursory understanding, you cannot roll the 72t account into the profit sharing plan. But, even if you could, I STRONGLY question whether or not it would be a wise idea anyway.
Permalink Submitted by Alan - IRA critic on Wed, 2018-12-05 19:06