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Problems with the Once-Per-Year Rollover Rule? This Week’s Q&A

By Jeffrey Levine, Director of Retirement Education  
Follow Jeff on Twitter: @IRAGuru4EdSlott

This week's Slott Report Mailbag looks into 72(t) payments, CD-IRAs, and the once-per-year rollover rule. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

I have a client who wants to take her 72(t) starting this month.  If we do our calculations (based on 72t.net) website, it gives us the annual amount. When divide by the number of months, can we take it for only 7 months? If so, do we divide by 7 or 12? The other issue is that it’s not exact, so should we just round up?

Thank you, Mark

Answer:

You can set up 72(t) payments on a fiscal year basis, or a calendar year basis. So, if you want to take the full annual amount now and then another annual amount in 2018 (and future required years), that would work.

Also, for a number of reasons, it’s better to take the exact same amount from one year to the next. If you’re taking monthly distributions, it’s also a good idea to take the exact same amount from month to month. If you can’t get the amounts to be exact based on the initial amount you calculate, lower the payments slightly so that they will all be the same. Remember, the 72(t) calculation will give you the maximum amount you can take using the schedule. You could always set a lower amount by using a slightly lower interest rate.

Question:

Dear Mr. Slott,

I’m not sure I will get a response, but as a leading expert in this field I thought I might give it a try.

I have a client that had a CD-IRA that matured on 3/15/17 for approximately $238K. He went to his bank to close it out in which the bank made the check payable to my client. My client brought the check to a different bank with the intention on opening up a new CD-IRA and was later encouraged to open an annuity instead. My client then submitted an application for the annuity and endorsed the check over to the insurance company. When the policy was issued the interest rate was less than what was quoted and my client requested cancellation under the "free look provision" contained in all annuities. The insurance company has indicated that my clients check in the amount of $238K has been mailed back to my client which we assume will be payable to my client.

If my client now takes that check and endorses it over to a new institution, do you see any problems with this? Since the rollover was not actually completed, I am hoping it will not fall under the once-per-year rollover rule. Is there anything you can recommend that my client should do to avoid any possible problems with the IRS?  Any guidance that you can provide would be appreciated.

Kind regards, Tom

Answer:

Tom,

Sounds like a really bad situation. There is no exception to the once-per-year rollover rule for a “free-look.” If I were you, I’d do everything in my power to get the insurance carrier to cancel the free-look check payable to the client and reissue it as a check payable to the receiving institution. Proceeding as intended will not work. Simply endorsing the check over to the new carrier won’t work. The client will be deemed to have “constructive receipt” over those funds and it will be a second rollover within a one-year period. The funds will be taxable and, if put into another IRA, will be subject to a 6% penalty for each year they remain in the account. If the company won’t cancel the check and reissue a new one payable to the other company, you might consider seeing if they’ll cancel the check and “un-free-look” the policy. The interest rate may not be what the client wants, but it’s probably a heck of a lot better than adding nearly 250k to their income in the form of a total distribution!

 

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