72t uncertainties

L1: 72t uncertaintiesDon”t know what happened to original message…forgive me if a repeat question. Facts: 56 yr old male began 72t in April 2007. Began the 2007 yr with around $500k IRA, curretn 72t distributions based on 500k…due to 2007 divorce 1/2 of account was transferred to ex-wife.Is unhappy with Fidelity (current 72t custodian)& wants to move elsewhere.Questions: 1) If moved to another investment or custodian,payments during 2007 beIRS penalized..corrrect? 2) if moved, new 72tpayments based on current value $190k or$500k (12-31-06, pre-split with ex)3) Any other red flags or issues?2007-09-27 09:18, By: JD, IP: [63.162.85.155]
L2: 72t uncertaintiesIf you take too long posting, the page times out and your post is lost. If you suspect that may happen in the future, copy the post to the clipboard before clicking to post, so you don”t loss the text. This happened to me a few times before I started to copy them.
Starting a 72t with a divorce proceeding in progress is a very bad idea unless everyone agrees up front that no part of the IRA needs to be subject to divorce transfer. The IRS has issued a number of rulings that conflict, so the general consensus is that there is a high risk that the partitioning of the IRA itself busts the 72t, irrespective of other custodian transfers that may also occur. The only good thing about this case is there is only something between 6 and 12 months worth of penalized distributions, and interest is not yet much of a factor. Worse case scenario is that client reports the penalty for distributions from April to present, then starts a new 72t plan from here on using a recent month end statement of 6/30 or later assuming the IRA was partitioned prior to that.
But to investigate this situation more closely, exactly when was a portion of the IRA ordered to be transferred to ex and on what date was the transfer actually made. Also, how much was the original 72t calculation and how much has he distributed to himself since the 72t began? What I am trying to explore here are any first year flexibility opportunities he can use to “restructure” the 62t on the go so that his documentation can be retrofitted to what the new account balance was. Those opportunities must be adapted to a number of constraints, but it is probably worth investigating even though it is a long shot. Please advise.2007-09-27 13:08, By: Alan S., IP: [24.116.165.60]

L2: 72t uncertaintiesUpdate:

The 72tcalculation was based on the entire 12/31/06 funds (including those set aside for the ex-wife in the divorce) around $395,000.

First 72tdistribution beganin May 2007….payment around $1915/mo after tax.

In August 2007she rec”d $145,000 of the $395k. Divorce papers also dated in May 2007.

Sounds like a Custodian transfer remains a risk….depending on mood of IRS.

However, would new 72t payment under new custodian be based on $395k or $250k? Seems odd that he can maintain $1915/mo if his $$$ is much less than $395k starting amount, including ex. But then again…. (P.S. He does NOT want the $1915 payment to be reduced.)2007-10-01 15:17, By: JD, IP: [63.162.85.155]

L2: 72t uncertaintiesGood morning JD:
I”m not going to try keeping the numbers straight since that part isn”t important. The important thing is to get some help directly from someone who really understands the intricacies of your situation, which can get real expensive real fast. My suggestion is to contact Bill Stecker (TheBadger) for help since he is highly qualified to deal with situations like the one you are trying to advise these people on.
Alan was trying to point out that you need to plan on a “re-do” of the whole 72(t) situation. You are going to have a bust so get ready for it. Here are two points to keep in mind:
1) Distributions from a 72(t) are based on the value of the entire SEPP Plan universe. If you add to or take from the value of that universe (taking money out and transferring to the “X-wife” is a “take from” event), the plan is a bust and penalties and interest are due. The good thing is that you are within a short time of having started distributions so the penalties and interest will be minimal.
2) Split up the SEPP Universe by transferring the necessary funds to the “X-wife” and establish a new universe for the client. Make new calculations based on the new values in the husband”s IRA / K-plan or whatever constitutes the SEPP Plan universe. Sorry but the distribution amount will be reduced since the new account value will go down after the division of the account.
Good luck and I hope this helps.
Jim2007-10-03 07:48, By: Jim, IP: [24.252.195.14]

L2: 72t uncertaintiesThank you for your assistance on this case!!
You have confirmed my gut feeling on this 72t. It felt like a bust & the new SEPP payment would be headed lower.
Since this 56 yr old is looking for different answers…I think that I will take a pass on this 72t.
Thanks!2007-10-04 07:06, By: JD, IP: [63.162.85.155]

L2: 72t uncertaintiesGood morning JD:
Your last statement, “Since this 56 yr old is looking for different answers…I think that I will take a pass on this 72t.”bothers me. Apparently this guy either came to you for advice on a problem, and to leave him hanging could create problems for you. This would be especially true if you are associated with a Registered Investment Advisor (RIA) firm, but also if you are just selling mutual funds under a Series 6. I would write him a letter, approved by your principal, and point out the following items:
1. Before he came to you for help, he had already created the mess (a “busted plan”) when he divided the SEPP Universe IRA with his X-spouse of an active, 72(t) distribution plan.
2. His complaint with the custodian is probably moot because of item # 1.
3. 72(t) rules are the rules, and it doesn”t matter how much he doesn”t like the answers, he isn”t going to get his way. The only thing he can do at this point is “damage control” by accepting the bust and restarting with a good SEPP Plan using the new numbers and accepting the newly calculated … lower … distribution amount.
4. As I stated in my earlier post, don”t try to fix this thing yourself. However, refer him to Bill Stecker (TheBadger) who is a CPA that is very well versed in fixing problems like this. Fact is, unless you have the crdibility of someone like Bill, the client is not going to accept what you say. But your objective now is to guide him to someone who can really help the guy and tell him like it is so he accepts his fate.
By doing this you will CYA if the guy tries to come back on you for NOT telling him how to fix his situation, and he may, eventually, come back to you,appreciate that you told him the truth about his situation and become a good client. On the other hand, if after writing him the letter he goes away mad, then you win big. If his attitude is such then you don”t want him as a client under any circumstance.
Good luck.
Jim2007-10-04 07:42, By: Jim, IP: [24.252.195.14]