Moving an IRA That is Making 72(t) Distributions
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
You are under age 59 ½ and need funds from your IRA to live on. You set up an early distribution payment plan that will be exempt from the 10% early distribution penalty (called 72(t), SOSEPP, or SEPP payments). You now want to move that account from your current IRA custodian to a new one. Can you do that?
If at all possible, you are better off not moving the funds. The only guidance we have from IRS on 72(t) payments is in Revenue Ruling 2002-62 and Notice 89-25. You are not allowed to change the balance in the IRA that is making the 72(t) distributions. You cannot make contributions or rollovers into that account and you cannot take funds out of the account other than the 72(t) distributions. In addition, Rev. Rul. 2002-62 says that you cannot make a “nontaxable transfer of a portion of the account balance to another retirement plan.”
In a recent private letter ruling, IRS ruled against a taxpayer who was taking 72(t) distributions. His advisor changed companies and the taxpayer wanted to stay with his advisor. He attempted to transfer the entire balance of his IRA to the new company. He later discovered that the new company would not accept one of the investments in his IRA so only a portion of the account was transferred. The rejected investment remained in an IRA at the old company.
Then the new company reestablished his 72(t) payments in the wrong amount. Corrections were subsequently made and the taxpayer asked IRS to forgive the errors that were made and to allow the payment schedule to continue. IRS has forgiven errors made by IRA custodians in the past. But in this case, IRS did not rule in the taxpayer’s favor. The reason they gave was that only a portion of the account was transferred.
The end result is that the taxpayer now owes the 10% penalty on all distributions taken to date, plus interest and perhaps penalties. Setting up a 72(t) schedule requires a commitment on the part of the IRA owner. You commit to taking only the amount of the 72(t) payment from that IRA, potentially kept at the same IRA company, for a minimum of five years. This is a commitment that lasts longer than many marriages.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.