72(t) Under 401K transferred to IRA

You are here:
< Back

L1: 72(t) Under 401K transferred to IRAI was reading the past posts. In February 2003 the question was asked concerning rolling a 401k) account into an IRA and transferring a 72(t) that was begun under a 401(k) plan to the IRA and continuing the annual payments under theoriginal72(t) plan. I asked this question three times this past week to three different IRS retirement plan specialists and all three said that since the original plan was a 401(k), the termination of that plan would invalidate the 72(t) plan and that back taxes and penalties would be owed. Has anything changed since last February?2003-09-13 15:15, By: Wayne, IP: [127.0.0.1]
L2: 72(t) Under 401K transferred to IRAHello Wayne:
I am going to give you the exact opposite answer. In my opinion, it matters not that the funds were originally in a 401(k) account and subsequently move to a 408 account (an IRA). 72(t) treats all of these accout types as the same unless specifically noted otherwise.
I would be interested to hear why these other retirement specialists think otherwise.
TheBadger
wjstecker@wispertel.net

2003-09-13 15:57, By: TheBadger, IP: [127.0.0.1]

L2: 72(t) Under 401K transferred to IRAThis has always been an interesting topic and one that I have always taken the conservative side of ans ineach plan should stand on its own.
I have seen nothing in writing that really states it either way in Black/White. I think that the transfer question is addressed in 2002-62: Section 2.02(e) states_ 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.
All qualified plans allow for the establishment of a SEPP, just like all qualified plans mandate minimum distributions. I further believe that just like you can’t use an IRA distribution to meet the MD requirements of a 401(k) or 403(b), that you also can’t combine all plans and make the annual SEPP distribution from only one. 2003-09-16 16:45, By: Gfw, IP: [127.0.0.1]

L2: 72(t) Under 401K transferred to IRAI have to take the other side of this argument:
(1) 72(t) specifically uses the language “retirement plans (as defined in 4974(c))”. If we go to 4974(c) we see that it includes all 401(a)’s — DB/DC/CODA plans; 403(a&b)’s; and 408(a&b)’s — essentially all IRAs excluding ROTHs. Thus we have clear statutory precedence/language to treat all of these animals the same for 72(t) purposes; unless otherwise noted; for which there are no notes in the context of this discussion for 72(t)(2)(A)(iv) —- SEPP plans.
(2) One can make an excellent public policy argument that strict interpretation of Revenue Ruling 2002-62 is harmful; e.g. taxpayer commences SEPP distributions from his 401(k) plan and then, due to plan rules is forced to take a QLSD and perform a trustee-to-trustee transfer of the assets to a rollover IRA and then simply continues the SEPP distributions from the IRA. To call this a violation of 72(t) or even Rev. Rule 2002-62, I am glad/sorry to say, is simply incorrect.
(3)”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.”
I will be the 1st to admit that this paragraph of the ruling contains some really bad language. However, we have to analyze each of the three situations to understand their true meaning.
With respect to (i) above — additions, I agree, don’t do it; it’s not permitted.
With respect to (ii) above we can look at two examples as instructive:

(A) taxpayer has IRA A at institution A (a qualified plan under 4974(c)) from which SEPPs are occurring. Taxpayer moves the entire IRA A to IRA B at institution B and simply continues the SEPPs. A literal interpretation of (ii) above says a violation has occurred. It has not. See 408(d) which allows portability of “deferred assets” through the use of rollovers & trustee-to-trustee transfers. In short, a rev.rule can not overturn or over rule the IRC; nor was that its intent.
(B) same facts as (A) above. Taxpayer gets newly employed with employer B & no longer needs SEPP distributions. Employer B has 401(k) plan that accepts “rollins”. Taxpayer rolls in the contents of IRA A into Employer B’s 401(k) plan. Employer B refuses to continue SEPP distributions because taxpayer has not satisfied the “separation of service” rule. This is a case where the taxpayer is using a new plan to block the assets from being distributed & is a violation because the taxable income stream has been modified, in this case down to zero.
With respect to (iii) above we can again build two examples:

(A) Taxpayer A has $500,000 IRA & is distributing $40k annually in two $20k distributions per year. Taxpayer distributes all $500k to himself & 30 days later, rolls all $500k into a new IRA. The “amount received” was $500k and he did do a “rollover”; therefore it’s a violation. NO, see 408(d) which permits the rollover. Further, taxpayer simply continues the $40k per year out of IRA B; thus no disruption in the declaration of taxable income.
(B) Same as (A) above; however, taxpayer takes the second $20k distributed (e.g. the “amount received”) and rolls it over into new IRA C therefore reducing his declaration of taxable income from $40k to $20k. This is a violation.
In short, this whole issue could have been fixed by a lead-in sentence fragment that said: “which results in a modification or change in the net taxable income declared by the taxpayer as a result of (ii) or (iii). Unfortunately that lead-in or trailer language is not there; instead it is implied.
TheBadger
wjstecker@wispertel.net
2003-09-16 17:55, By: TheBadger, IP: [127.0.0.1]