72-T Rules if once modified

L1: 72-T Rules if once modifiedArollover from a 401-K plan into an IRA of $240,000 was completed in 2004. A total of $200,000 spread over 4 different funds was set up as a 72-T Amortization method following new rules after year 2003. The remaining $40,000 was left in a separate fund to be used for emergencies, understanding that withdrawals from that fund would be subject to the 10% penalty.
Upon taking a distribution from that 5th fund (not part of the 72-T 4 funds), I was informed that because each of the 5 funds were identified by name, but did not have a separate “account number” assigned to them, it invalildated the 72-T for the year 2005 and that the code (2) would not be used when reporting on the end of the year 1099 forms.
They also indicated that the 72-T could NOT be resumed in 2006 or after because once having modified it as stated above, the 72-T was over asthe investment company saw it. What do you think? Appreciate any help you can give.
Question 1
It seems unfair that since thedistributions from the 4 funds used in the 72-T initial calculation have not been changed and have been continuously withdrawn as orilginally set up, that they should not reportdistributions with a code (2) allowing the exception to the penalty.
Question 2
If that company will not allow a “resumption of the 72-T” for future years, can thefunds be rolled over to a different company and the 72-T resumed using the same exact distributions as previously set up.
Will greatly appreciate any help you may be able to give me.
Thanks2005-11-29 09:14, By: Ed M, IP: [141.157.39.36]

L2: 72-T Rules if once modifiedHello Ed:
I’m going to try some “reading between the lines” for your situation. I think what I’m reading is that you rolled the K-plan into an IRA with one account number, then made investments into five funds while stillunder the same account number. How am I doing?
If this is correct, then your custodian considered all five funds as part of your SEPP universe sincetheir tax reporting on Form 1099-R probably references the account number.
TheBadger or GFW may have some ideas howyou mightrecover from this situation, and I hope they do. But going forward you should have one account for your SEPP universe and a different accountfor the Non-SEPP IRA.
Good luck.
Jim2005-11-29 09:45, By: Jim, IP: [70.184.1.35]

L2: 72-T Rules if once modifiedHello Ed:
There are multiple issues here to which the answers are only somewhat clear.
The IRS has been clear that when an IRA account is included in a SEPP plan, the entire account must be included. Thus, in this sense, your custodian is correct on issue #1. However, the purpose of this rule (of including the entire account) is obvious and practical. You might have a leg to stand on if you can conclusively trace the 4 funds versus the 1 fund and seek a PLR to split them apart indicating that you thought you had 5 accounts all along. This is a bit risky and would be wholly dependent on your ability to conclusive trace the dollars.
With respect to issue #2, your custodian is dead wrong. The IRS has permitted a taxpayer to draw a bright line in the sand (actually the calendar) and declare the old SEPP plan dead and broken and therefore the taxpayer pays all the penalties and interest on that old plan. Then, the taxpayer is free to commence a new second SEPP plan on any date after that bright line date.
TheBadger
wjstecker@wispertel.net
P.S. Obviously, you have provided probably 1/10th information really needed to analyze this situation in detail. I would suggest you immediately seek competent tax counsel to evaluate the details.
2005-11-29 09:55, By: TheBadger, IP: [66.250.23.21]

L2: 72-T Rules if once modifiedClarification to post made earlier in this day concerning Rollover and 72-T plan.
This rollover was from a lump sum buyout from Verizon, not a 401-K rollover as I previously stated. It is not a SEPP plan but now a traditional rollover IRA.
As previously stated, $240,000 rollover spread over $200,000 in 4 funds with data processed for 72-T. Remaining $40,000 left in a 5th fund. Although each fund does NOT have an individual acct #, each fund is very identifiable. Withdrawals from the 4 72-T funds have been the same for all 24 months of withdrawals. Only the 5th fund has non-regular withdrawals on which the 10% penalty was paid to IRS.
As an added note, custodian in year 2004 (acct set up in January 2004) coded the 72-T distributions correctly with the exception to the penalty and coded the one distribution from the 5th fund (not part of 72-T by design) with no exception.
That year was done correctly as I see it. It was not until late Oct this year when
requesting another distibution from 5th fund that it surfaced that the 72-t had been modifiedin their view and all distributions would not not be coded with the exception Code 2.
I think Badger has indicated that IRS would allow a rollover to a new fund company and a new 72-T to be set up. Do I understand that correctly?
Thanks for your help. Maybe this additonal info abore will enable someone to provide some additional information. Please respond if you have any ideas.
2005-11-29 19:08, By: Ed M, IP: [141.157.39.36]

L2: 72-T Rules if once modifiedDo you have any documentation that clearly indicates that the 5th fund was excluded from the initial calculations? If yes, then you may want to pursue a PLR to attemptavoid busting the original SEPP and incurring the penalty.
What the Badger’ was stating is that there is nothing preventing a taxpayer from busting one SEPP (and paying the appropriate penalties) and then starting a new SEPP either with the same (or a new) Trustee/Custodian. It isn’t mandatory that you receive a code of 2′ on the 1099, you merely have to file a form 5329 and be ready to justify the plan to the IRS. Bill’s earlier advice still holds You might have a leg to stand on if you can conclusively trace the 4 funds versus the 1 fund and seek a PLR to split them apart indicating that you thought you had 5 accounts all along. This is a bit risky and would be wholly dependent on your ability to conclusive trace the dollars.’
You may want to contact you tax advisor, or if you don’t have one, contact Bill directly he can probably give you an estimate of both the odds of success and the cost that you may incur.2005-11-29 19:44, By: Gfw, IP: [172.16.1.71]

L2: 72-T Rules if once modifiedEd:
TheBadger and GFW have laid out quite well what your situation appears to be and the actions you probably should take. I would definitely contact Bill (TheBadger) directly for assistance.
From your last post I see we need to clarify some terms for you. When we mention SEPP Plan, we are talking about a Substantially Equal Periodic Payment (SEPP) Plan, not to be confused with a Semplified Employee Penson (SEP) IRA. IRS Section 72(t) governs the SEPP Plan we are talking about, not the SEP IRA. Sorry about the confusion which comes up quite often.
Good luck.
Jim2005-11-30 08:52, By: Jim, IP: [70.184.1.35]