Trustee to Trustee transfer of IRA subject to SEPP
Client age 57 wants to transfer his IRA in total to a new broker (very unhappy with current one). For illustrative purposes, say there is $600K in current IRA with a $4,500 monthly SEPP, just finishing year one of the SEPP. Client likes the bond portion of his portfolio, about $325K of the $600K, so he wants to liquidate his stock portion and transfer $275K in cash and the $325 bonds in kind. The new broker would like to utilize a managed money platform, but he cannot hold the bonds in such platform. Can 2 new IRA’s be established, one to reinvest the $275K of cash in a managed money platform and one to hold the $325K of bonds in kind in a brokerage investment account, as long as the $4,500 monthly SEPP is continued between the two IRA’s? Or would doing so bust the 72(t) SEPP exception?
Permalink Submitted by [email protected] on Thu, 2007-09-13 20:23
I think you are ok to do that but if i was you i would copy my question and paste at http://www.72t.net and see what they have to say. These guys are the gurus of 72ts they aslo have a manual out that is worth the $
Nick
Permalink Submitted by Alan Spross on Thu, 2007-09-13 21:49
You are “probably” OK, only probably.
The problem is PLR 2007 20023 that ruled a SEPP was busted due to a partial transfer, even though it went to a brand new IRA account. An interpretative ruling from the IRS by Bill Stecker, an authority on SEPP plans, received a cursory and incomplete response from the IRS and did not directly answer any of his qualifying questions. Basically, all the IRS did was reiterate it’s prior baffling ruling.
It is important to note that this PLR did not address complete transfers, but was written in such a way that there may even be some risk in doing complete transfers, albeit much less than doing partial transfers.
There has also been no reported increase in IRS inquiries into current plans, when there are thousands of them out there that have transferred accounts over the term of the SEPP.
My conclusion is that there is not much risk, but there may be some. Another source of risk may arise from having to attach Form 5329 to report client’s own exception if they have been one of the lucky ones currently still getting the Code 02 exception on the 1099R from the current custodian. One option may be to wait until the IRS defines the issue more clearly, either by ruling or by doing nothing to follow up on the baffling ruling of PLR 2007 20023. You may wish to pull that one up and read it.