72 (t) SEPP Internal Account Change

L1: 72 (t) SEPP Internal Account ChangeI established an IRA 72t SEPP account in January 2006. There are 3 individual accounts within it: a variable annuity, a prime account, and a brokerage account.
The prime account is the largest and is all invested within the same account number (an actively managed mutual fund model). This account number is limited to this particular investment. I want to sell some of the mutual funds and invest the money differently WITHIN THE SAME 72t PLAN. So now, I would have 4 or more total accounts.
I am being told by my financial adviser that I should not upset the original 3 account number set-up. He does not recommend splitting up 72t account balances. He says it will create other separate account numbers and then different 1099R’s showing the prime account distribution from different accounts.
I currently receive monthly RMD payments from my 3 original accounts. I am 55 years young and need to continue the SEPP distributions for another 4.5 years……..
Thanks, Pete2010-08-31 06:42, By: Pete, IP: [70.180.202.207]

L2: 72 (t) SEPP Internal Account ChangeDefinitely. It’s no different than changing stocks within a brokerage account, or changing mutual funds.2010-08-31 13:36, By: dlzallestaxes, IP: [72.78.110.86]

L3: 72 (t) SEPP Internal Account ChangeThanks for your reply! I really appreciate it. My financial professional states that I am stuck with the original account structure from 2006. Can you provide any IRS guidelines to support this???
Pete2010-08-31 19:49, By: Pete, IP: [70.180.202.207]

L2: 72 (t) SEPP Internal Account ChangeYou could simplify your life and expand your “diversification” options if you begin by transferring the stand-alone mutual fund IRA account into your brokerage account IRA. Once in the brokerage environment you can purchase a variety of assets for maximum diversification. Simply adjust the distribution amount from the brokerage account to include the amount you are receiving from the mutual fund account and you will be OK. Your VA IRA would have to remain separate.
Jim2010-08-31 14:32, By: Jim, IP: [70.167.81.119]

L3: 72 (t) SEPP Internal Account ChangeJim, Thanks for your reply! I really appreciate it. My financial professional states that I am stuck with the original account structure. Can you provide any IRS guidelines to support this???
Pete2010-08-31 19:50, By: Pete, IP: [70.180.202.207]

L4: 72 (t) SEPP Internal Account ChangePete… I have a much better idea. I don’t know what credentials your “financial professional” holds, but since he/she made the statement, why not have him/her produce the Regulations, IRS Notices, PLRs, etc that state that you can’t do it.2010-08-31 20:20, By: Gfw, IP: [24.148.10.164]

L5: 72 (t) SEPP Internal Account ChangeJim….I just e-mailed him with that exact request. Thanks for your interest in helping me!
Cheers, Pete2010-08-31 20:29, By: Pete, IP: [70.180.202.207]

L5: 72 (t) SEPP Internal Account ChangeSorry “Gfw”, I accidentally wrote “Jim” in my reply to you…..2010-08-31 20:41, By: Pete, IP: [70.180.202.207]

L6: 72 (t) SEPP Internal Account ChangeWhat professionalcredentials does your “professional” financial advisor have ?
What experience does he have with SEPP T2-T plans ?
If you do not want to change firms, ask him to get help from a supervisor who is experienced in your situation.
If all else fails, or he is uncooperative, or defensive, change financial advisors to one who is more qualified.2010-09-01 00:49, By: dlzallestaxes, IP: [72.78.110.86]

L7: 72 (t) SEPP Internal Account ChangeIt is possible that the advisor is concerned about the IRS letter ruling on partial transfers (PLR 2007 20023). At least that might show that he is familiar with the subject. I think the risk of your doinga partial is small, but there is still a risk so some advisors may recommend avoiding a partial transfer.
Or, as others have stated, he just might not be up to speed on any of this……….you will have to ask some pointed questions to find out.2010-09-01 01:27, By: Alan S., IP: [24.116.165.60]

L8: 72 (t) SEPP Internal Account ChangeI responded to your post on another site, and there it was clearer that all you want to do is change investments within one of the IRAs, NOT to change the structure or create any new IRA accounts. In my prior post I thought you were considering a structural change to the IRA accounts, not just an investment change. An investment only change within any of the accounts is not a problem, in fact investment changes are not even reported to the IRS.2010-09-01 04:24, By: Alan S., IP: [24.116.165.60]

L9: 72 (t) SEPP Internal Account ChangeAlan……I only have the one 72t plan which currently has 3 separate accounts in it. The prime account is the largest and is all invested within the same account number (actively managed mutual fund model). I want to sell some of the mutual funds and invest the money differently but within the same plan. So now, I would have 4 or more total accounts.
I am being told by my financial adviser that I should not upset the original 3 account number set-up. He does not recommend splitting up 72t account balances. He says it will create other separate account numbers and then different 1099R’s showing the prime account distribution from different accounts.
I currently receive monthly RMD payments from my 3 original accounts.
I’m doing the best I can to explain this….Thanks for you help!!!
Cheers2010-09-01 05:50, By: Pete, IP: [70.180.202.207]

L10: 72 (t) SEPP Internal Account ChangePete:
When you talked about diversifying your “Prime Account” of one mutual fund, I assumed you would be exchanging into a different fund within the same fund family. This action would keep all “Prime Account” assets under the same account number and would not be a problem. But now it sounds like you want to sell part of this single fund and purchase fund(s) from one or more different fund families which would create a new account number and the fourth separate account within your SEPP Universe.
Go to the FAQ’s on this site and review the two PLR’s listed below which seem to address your situation.
200925044 – Partial Transfer of SEPP treated as Distribution subject to 10% Penalty
200720023 – Partial Transfer of SEPP treated as Distribution subject to 10% Penalty
Here is the pertinent section of these PLR’s as I read them:
Section 2.02(e) of Revenue Ruling 2002-62 further provides that under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected. Thus, a modification to the series of payments will occur, if after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.۝
After re-reviewing the above I guess it’s time for me to take out my knife and fork and enjoy some good breakfast crow,۝ thus retracting my earlier suggestion to transfer your Prime Account۝ into your brokerage account.۝ Items (i) and (ii) above seem to clearly prohibit the transfer I suggested. Granted these prohibitions don’t make a bit of common sense, but then when has the IRS been known to exhibit common sense.
However, I do not see any prohibition to diversifying your Prime Account Fund۝ into other funds within the same fund family while keeping the same Account Number.
Unless someone else can support the transfer into the brokerage account which I suggested in my first post, I will have to conclude that you are stuck with your existing three accounts as your SEPP Plan Universe.
Jim2010-09-01 14:21, By: Jim, IP: [70.167.81.119]

L11: 72 (t) SEPP Internal Account ChangeI interpret (ii) differently.
I think that it means what it says “into another RETIREMENT PLAN”. It does not say “into another RETIREMENT ACCOUNT”.
I believe that there are different TYPES OF RETIREMENT PLANS, namelyIRA, SEP, SIMPLE, 401-K, 403-B, DEFINED BENEFIT, DEFINED CONTRIBUTION, etc. I think that the IRS means that you cannot transfer to or between these different TYPES of PLANS, but that you can transfer to or between ACCOUNTS under the same type of PLAN.
Similarly, under (i), I think that IRS is saying that you cannot increase the beginning balance that your calculation is based upon by adding additional accounts to the PLAN UNIVERSE. But I do not interpret this to mean that you cannot diversify your plan universe by transferring from any of the initial accounts into new ones, so long as you are not changing the total amounts in the plan universe.
I have not see any IRS interpretation of this ruling either in support of your interpretation or mine.2010-09-01 14:56, By: dlzallestaxes, IP: [72.78.110.86]

L12: 72 (t) SEPP Internal Account ChangeI would tend to agree with DLZ. For most every purpose except a SEPP plan (past PLRs 9050030 & 9525062), the IRS has always viewed IRAs owned by an individual as one single IRA and hence one retirement plan. Consider… If you have multiple IRA accounts, your maximum contribution to your multiple IRA accounts in any combination cannot exceed the maximum annual contribution allowed. If you are taking minimum distributions, you must use the total amount in all of your IRA accounts to determine the required amount of your minimum distribution.
This issue comes up frequently and that is why we included the best alternative in our Planning Pointers … Consider using a brokerage Custodial Account for your SEPP plan that allows you to choose investments from any source that you desire. Reallocating your investments within your custodial account is different from doing a Partial Transfer to a new Custodian. Partial transfers were rejected by the IRS in PLR 200925044 & PLR 200720023.2010-09-01 16:17, By: Gfw, IP: [24.148.10.164]

L12: 72 (t) SEPP Internal Account ChangeDLZ….I agree with you 100%. You make it sound so simple!!!! I will pass your interpretation on to him. I am a U.S. Coast Guard licensed Chief Engineer and rely heavily on machinery instruction manuals for answers. I am frustrated with the lack of available 72t information.
This is an excellent site! Brillant, generous people willing to share their time and wisdom…….
Pete2010-09-01 21:37, By: Pete, IP: [70.180.202.207]

L13: 72 (t) SEPP Internal Account ChangeThank you.
I have a basic premise that I taught my kids, and other tax practitioners When you communicate verbally or in writing, the main idea is not to make sure that you are understood, but rather make sure that you cannot be misunderstood.
Too bad Congress and the IRS never learned this lesson.2010-09-02 00:53, By: dlzallestaxes, IP: [72.78.110.86]

L12: 72 (t) SEPP Internal Account ChangeDLZ and all…….I wanted to finalize my posts with the following reply from the Senior Attorney at my financial advisers firm.
I did some research but there has been no further definitive guidance from the IRS, nor can I find any PLRs directly on-point addressing this type of situation. In my view, the proposed transaction would constitute a modification to the 72(t) payments, as there would be a “nontaxable transfer of a portion of the account balance to another retirement plan”, as specified in Section 2.02(e) of IRS Revenue Ruling 2002-62. An outside consultant also had the same interpretation. Furthermore, in our opinion, the reference to “another retirement plan” in Revenue Ruling 2002-62 does notsolely refer to qualified retirement plans but also encompasses IRAs. Our views may beconservative, andthe issues maybe viewed differently by others. Ultimately, the client should seek the opinion of his tax advisor.
From my financial adviser:
Our legal team also stated if the client would insist on moving forward with the separation of 72(t) assets, then I would need a Hold Harmless letter in the file.
Thank you all for your opinions. It’s ultimately my decision to move forward or not. I’ll be glad when I turn 59.5 and tell the IRS to shove this 72t plan.
Best, Pete2010-09-03 19:56, By: Pete, IP: [70.180.137.229]

L9: 72(t) SEPP Internal Account ChangeAlan…The mutual fund account in question is a third party manager platform that must be under it’s own account number within my 72t plan. I just want to sell a percentage of the funds and invest them in another new account within the same 72t plan. This does not involve any partial fund transfer to another custodian……….My financial adviser is only following the advice of the legal team at his firm. They are conservative with this whole 72t deal and it’s vague guidelines. I still have 4.5 years of SEPP RMD’s to receive. I guess I can’t complain…..I have good health, wealth and my freedom.I have presented him with some of your excellent comments and some from others on the 72t.net. He mentioned that I could sign a waiver to accomplish this if the legal team still does not approve???Pete2010-09-02 23:04, By: Pete, IP: [70.180.202.207]

L10: 72(t) SEPP Internal Account ChangePete,
If I understand your collective responses correctly, you now have 3 IRA accounts that constitute your SEPP plan, and you want to create a 4th account by direct transfer using part of the balance from one of the 3 original IRA accounts.
It is certainly possible that this action could be considered very similar to that which gave rise to PLR 2007 20023. But if you review the analysis of 2007 20023 posted on this site including a request that the IRS clarify their reason for their findings, you will find that the IRS simply cannot or will not explain this ruling. Therefore, most of us consider the ruling an aberration. There has been no IRS follow up in the last 3 years, and a few thousand more people have probably used such transfers over that time period.
Note that if you did not take distributions from the new IRA account, there should be no 1099R for it and no 5498 either. The IRS would not even know about your transfer unless they audited you. You could just distribute your annual amount from the 3 original accounts.
My guess is that this PLR is what your advisor is concerned about, as I cannot think of any other reason for his concern. But the final decision is yours. None of these custodians can stop you from doing a partial transfer if you wish. All they can do is refuse to provide you with the 1099R exception code and they probably are not doing that now. You can file a 5329 very easily and may already have been doing so. You could also do a full transfer of this IRA to the new IRA and still end up with 3 accounts and avoid the partial transfer question that triggered 2007-20023.
In the end, the decision is yours. If it were me I would do it if I expected significantly better investment results as a result of the transfer, but would not do it for an extra percentage or two.
2010-09-02 23:53, By: Alan S., IP: [24.116.165.60]

L11: 72(t) SEPP Internal Account Change
To all…….I wanted to finalize my posts with the following reply from the Senior Attorney at my financial advisers firm.
I did some research but there has been no further definitive guidance from the IRS, nor can I find any PLRs directly on-point addressing this type of situation. In my view, the proposed transaction would constitute a modification to the 72(t) payments, as there would be a “nontaxable transfer of a portion of the account balance to another retirement plan”, as specified in Section 2.02(e) of IRS Revenue Ruling 2002-62. An outside consultant also had the same interpretation. Furthermore, in our opinion, the reference to “another retirement plan” in Revenue Ruling 2002-62 does notsolely refer to qualified retirement plans but also encompasses IRAs. Our views may beconservative, andthe issues maybe viewed differently by others. Ultimately, the client should seek the opinion of his tax advisor.
From my financial adviser:
Our legal team also stated if the client would insist on moving forward with the separation of 72(t) assets, then I would need a Hold Harmless letter in the file.
Thank you all for your opinions. It’s ultimately my decision to move forward or not. I’ll be glad when I turn 59.5 and tell the IRS to shove this 72t plan.
Best, Pete
2010-09-03 20:10, By: Pete, IP: [70.180.137.229]

L12: 72(t) SEPP Internal Account ChangeI think your findings boil it down to the same issue we thought, ie the probable interpretation of 2007-20023 that the IRS is considering a different IRA account as “another retirement plan”. Of course, that does not explain all the total transfers that happen every day that the IRS has never questioned and all the partial transfers other than the one in 2007-20023 that have never been questioned.
The consensus has always been “another retirement plan” meant another TYPE of plan, ie 401k to IRA, IRA to 403b etc.
At least we eliminated the possibility that the advisors were considering something that we had not considered or that was flat wrong. So it comes down to a very minute risk you would be taking, so you will have to do what allows you to sleep best at night.
2010-09-03 23:06, By: Alan S., IP: [24.116.165.60]

L13: 72(t) SEPP Internal Account ChangeI forwraded this thread to the Taxpayer Advocacy Panel, and to Nina Olson, National Taxpayer Advocate. I’ve asked them to elevate this issue to a high priority to get IRS to clarify/explain their interpretation, and why they believe “partial transfers” of SEPP 72-T are modifications.
WHo knows, maybe they’ll even answer me. ( I do have a direct contact with Nina Olson, and have had numerous issues elevated by her on behalf of the tax practitioners in PA.)2010-09-04 14:31, By: dlzallestaxes, IP: [72.78.110.86]

L14: 72(t) SEPP Internal Account ChangeDLZ…….I really appreciate you forwarding my concerns to your mentioned authorities.
If any of you that have replied ever visit Las Vegas, I owe you a dinner…….Let me know!
Have a great holiday weekend……
Pete

My recent reply to Jim:
Hi Jim…….I’ll try to be more specific.I retired in January 2006 with a lump sum buyout. I was 50 years young. The proceeds were split up into 3 separate account numbers: a VA, brokerage, and prime account all within the same 72t plan and same custodian. All of the Form-1099R’s I have ever received are coded “2”.The VA is nothing special. I’ll be glad when the surrender charges expire so I can get rid of it!The Brokerage Account consists of several REIT’s (public & non-public), mutual funds, futures portfolio.The original Prime Account was all invested in separate mutual funds that I paid my adviser to manage. A few years ago, we sold “ALL” those mutuals and went to a third party manager platform, another actively managed mutual fund account. It required it’s own unique account number. This new number is different than the original prime account number which I guess is gone since it had a zero balance. So, I still only have 3 accounts.With all that I’ve learned since I posted last week, was that “NOT” a partial transfer from the original prime account to the new third party managed account??????Currently, the funds expense ratios are high and the management fee is not cheap. My intention was to sell a percentage of the third party managed account mutuals and create another new account number with some exposure to ETF’s and individual stocks (same custodian, same 72t plan).I had no idea this could be such a big deal! It’s my hard earned money and I am now receiving the calculated RMD payments based on the total acount value as of 31 Dec 2009. Enjoy your holiday weekend and thanks for your interest in helping me….. Pete

2010-09-04 22:52, By: Pete, IP: [70.180.137.229]

L10: 72(t) SEPP Internal Account ChangePete:
I have a comment and a question or two about your comment to Alan …
“Alan…The mutual fund account in question is a third party manager platform that must be under it’s own account number within my 72t plan. I just want to sell a percentage of the funds and invest them in another new account within the same 72t plan. This does not involve any partial fund transfer to another custodian……….”
Based on your description above, I do believe youARE talking about a partial transfer of some of the assets in the managed money account to a new IRA account. Hence the source of the thoughts that you are creating a modification.
Q1. What are you trying to accomplish with this partial transfer? Are you trying to change part of the investment plan to a more conservative posture? Please give specific details.
Q2. If you are trying to change your investment risk level, like to become more conservative, why don’t you direct your manager to change the entire portfolio to be more conservativer? By doing this you don’t create the uncertainty by making a partial transfer from this account.
I may not see your response until next Tuesday since I don’t normally come into the office on weekends.
Jim2010-09-04 18:18, By: Jim, IP: [70.167.81.119]

L11: 72(t) SEPP Internal Account ChangeHi Jim…….I’ll try to be more specific.I retired in January 2006 with a lump sum buyout. I was 50 years young. The proceeds were split up into 3 separate account numbers: a VA, brokerage, and prime account all within the same 72t plan and same custodian. All of the Form-1099R’s I have ever received are coded “2”.The VA is nothing special. I’ll be glad when the surrender charges expire so I can get rid of it!The Brokerage Account consists of several REIT’s (public & non-public), mutual funds, futures portfolio.The original Prime Account was all invested in separate mutual funds that I paid my adviser to manage. A few years ago, we sold “ALL” those mutuals and went to a third party manager platform, another actively managed mutual fund account. It required it’s own unique account number. This new number is different than the original prime account number which I guess is gone since it had a zero balance. So, I still only have 3 accounts.With all that I’ve learned since I posted last week, was that “NOT” a partial transfer from the original prime account to the new third party managed account??????Currently, the funds expense ratios are high and the management fee is not cheap. My intention was to sell a percentage of the third party managed account mutuals and create another new account number with some exposure to ETF’s and individual stocks (same custodian, same 72t plan).I had no idea this could be such a big deal! It’s my hard earned money and I am now receiving the calculated RMD payments based on the total acount value as of 31 Dec 2009. Enjoy your holiday weekend and thanks for your interest in helping me….. Pete2010-09-04 22:31, By: Pete, IP: [70.180.137.229]