72T Election Not Made by Advisor

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L1: 72T Election Not Made by AdvisorMy husband’s financial advisor failed to make the 72T election correctly when he set up his SEPP’s from 2 rolled over IRA’s in 2006. He is now being audited for the penalties for 2007. The IRS will undoubtedly go back to 2006 as well and we also have the penalty ahead of us for most (if not all) of 2008 and, of course, we’re heading head long into 2009 as well. Two questions…1) Can the financial advisor or his firm be held liable for this mistake that he openly admits he made?2) My husband was newly widowed and unemployed after caring for his late wife through her cancer struggle when he began the SEPP’s in 2006. Today, we no longer need the SEPP’s and in 6 months he will be 59 1/2 anyway. The financial firm wants us to now fill out the 72T election form ASAP. The financial firm already states they cannot correct the history on this, they can only modify the election moving foward. So, if the IRS is not going to forgive this penalty (caused by the clerical error of not having filed the 72T election form orgininally) there is no benefit in signing the election form now…… we should just stop the distributions. However, if the IRS does forgive the ‘clerical error’ and we have stopped the distributions we then become liable for the penalty due to the stopped distributions. What should we do?2008-11-08 09:44, By: brenda, IP: []
L2: 72T Election Not Made by AdvisorOnly a court can determine whether the advisor is financially liable – it will really depend on your documentation and how far you want to press the issue.Whether or not the advisor is financially liable, the IRS will assess you for the penalties and interest -an IRA is always between you and the IRS. There is no election form that is mandatory unless the brokerage company insisted on a form. It is highly recommended as part of the documentation if there is an audit, but not mandatory.You also give no indication as towhat the “clerical” error was. Was it really a clerical error or a bad choice of assumptions used in the design of the plan.2008-11-08 11:04, By: gfw, IP: []

L2: 72T Election Not Made by AdvisorI am not entirely clear on where the advisor made the original error in establishing the disbursements as 72T SEPP’s. They were calculated correctly and have been disbursed accordingly. I assumed it was a missed election form since that is what they are sending us now and asking us to execute it. I’m still wondering if we need to execute the 72T today just to protect the possiblity that the IRS may forgive this error as long as we continue the disbursements as we had originally planned. One of the SEPP’s is from a variable annuity. We would prefer to stop the disbursements entirely if there is no forgiveness from the IRS on the prior distributions and the penalties have to be paid regardless.2008-11-08 16:40, By: brenda, IP: []

L2: 72T Election Not Made by AdvisorIt is not clear to me what the deficiency in the plan actually was, and whether ” his SEPPs from 2 IRAs” means that there was one plan for both IRAs or whether there were two independent plans, each using one of the IRAs. The advisor needs to clarify exactly why they feel the plan is busted beside the failure to file a specific form, which is not even a formal requirement, as gfw indicated. Like many advisors, this one may not be experienced or competent in this area. You need to find out specifically if the plan was really busted and why. Possibly, if the calculations and distributionswere correct, and neither the 1099R form nor the tax return did anything to show that an exception to the penalty applied, the IRS would expect that the penalty was due. Most 72t plan tax returns now require a proper Form 5329 to claim the exception because the IRA custodians have chosen to stop underwriting the accuracy of the plan calculations and accordingly issue a 1099R with a code of 1 in Box 7, which means that the penalty applies. The taxpayer then files a 5329 to claim the penalty exception under 72t. In your case, this situation might apply to one of the two IRA accounts if there are separate 72t plans, or to both IRAs.Was there a bona fide 72t calculation done in 2006, and have the distributions matched up to that calculation? If the answer happens to be “Yes”, then it is quite possible that the plan (or plans) might meet the requirements. More information is needed.If you can get these basic answers clarified prior to year end, it will provide some insight on what to do with distributions prior to year end. If you know the plans are busted for a fact, then do not take any more distributions that will be penalized. Wait until he reaches 59.5. But if the plans were really not busted, then the proper amount must be distributed in 2008 through 2010to protect the two prior years from retroactive penalty.2008-11-08 16:44, By: alan+s., IP: []

L2: 72T Election Not Made by AdvisorBrenda,I had not seen your recent post when I posted mine, but nothing in it would have changed my post. In fact, I think we are both thinking along the same lines.That is, WHAT technical deficiency in either calculation or execution has busted this plan or one of the plans if there are in fact two plans? If there is none, then 2008 distributions must follow suit to protect the plan. But if there IS a specific failing in 06 or 07, then the distributions should be stopped since they are not really needed any longer and you already have a busted plan.2008-11-08 16:50, By: alan+s., IP: []

L2: 72T Election Not Made by AdvisorI am not aware of any form or “election” that must be filed with teh IRS when you start a SEPP 72-T plan. The only form to be filed would be the 5329, mentioned by others, which is filed with the 1040 to indicate the EXCEPTION from the 10% penalty for early distributions because of your PLAN of “SUBSTANTIALLY EQUAL PERIODIC PAYMENST — SEPP”. Usually financial institutions require that you submit your “plan” and related calculations to them for their records, which would include the IRA accounts and balances that you included in your calculations.2008-11-09 11:43, By: dlzallestaxes, IP: []