72t error
I have a client that we set up a 72t for earlier this year on one of his ira accounts. He has another ira account with us as well. He called my assistant last week and requested a distribution from his non-72t ira. My assistant made a mistake and put his 72t ira account # on the distribution form. As a result this distribution was taken from his 72t ira and transferred to his checking account earlier this week. We are worried that we have blown up his 72t with this mistake and he is going to get killed with taxes and penalties. This was obviously not the intent of the client and we are trying to figure out how to fix it. Any advice? Thanks.
Permalink Submitted by Alan Spross on Fri, 2007-08-31 20:14
1) If the distribution does not put him over his 2007 72t figure, just reduce the future distributions so that the 72t IRA ends the year with the exact amount distributed.
2) However, if this puts him over the limit for the year, and IF he has not used his one rollover per 12 month period for the account, just roll the funds back into the 72t account. Even with a reported rollover on Form 1040, he should be OK if the net distributed amount for the year is correct. Then take the distribution from the non 72t account as originally intended. Do NOT rollover funds from the non 72t account to the 72t account as a short cut, as that would bust the plan.
3) If he has a prior rollover from the 72t account in last 12 months, then the ice gets very thin and you would then probably have to attempt the IRA transfer from the other IRA (which is technically a bust), but if you have enough influence with the IRA custodian(s) to be sure they will not issue a 1099R or 5498 on the transfer, you could document everything internally and try the transfer. If the custodian reports this, then you might end having to pursue a PLR explaining all the moves, and while the chances of success are there, these are now quite expensive. PLR 2006 16046 was a recent successful PLR to correct an error not accountable to the IRA owner.
Permalink Submitted by Will Langdon on Fri, 2007-08-31 23:53
I don’t think this distribution has taken him over his 72t amount for the year so this may be an option. I assume I would need to explain this the ira custodian, National Financial, and they should know what I am talking about.
However, if this does not work can you elaborate on the “one rollover per 12 month period” and how this relates to the 72t. Does this mean that when someone sets up a 72t they have one opportunity each year to roll money they have taken out of the 72t ira back into the 72t ira? To roll it back in would the client just cut the check from his checking account and have us mail it to the ira custodian explaining what we are doing? Thanks.
Permalink Submitted by Alan Spross on Sat, 2007-09-01 00:46
The one rollover rule applies to all IRA accounts whether under 72t plans or not. But you hit the nail on the head, a taxpayer does have one chance a year to roll back funds into the 72t IRA account to correct excessive distributions. Of course, this rollover must be done within 60 days like any rollover, but you are OK there because you just discovered the error.
Sometimes there is confusion on this issue because technically a 72t distribution is NOT rollover eligible. But in this context, distribution amounts that annually exceed the 72t plan are NOT considered 72t distributions, so all the IRS is concerned with is that no amount of the required distribution is rolled back into a retirement plan. Amounts can be rolled back at any time but it’s best to save the one rollover until you really need it, which typically would be in December when you take stock and find that too much has been distributed for some reason. Once you use up the one rollover you must be even more careful, because that flexibility is lost for another year.
Yes, the client would just cut a check from his checking account and it would be reported to the IRA custodian as a rollover (not a new contribution). The result will be line 15a of Form 1040 will have a figure that is too high, but 15b will be less as “Rollover” will be entered next to 15b. Of course, 15b will be even less if client has ever made non deductible contributions which make all his IRA distributions partially tax free.
Most IRA custodians are sadly no longer coding the 1099R with the 72t exception, and that forces the taxpayer to attach Form 5329 to claim the 72t exception. If you can talk the IRA custodian into providing the exception on the 1099R, it provides some insurance against IRA inquiries, but most custodians have decided that they no longer want the responsibility of determining that all the rules have been met.