72t when divorce is involved
L1: 72t when divorce is involvedPlease help me with a general (I think) 72t question. Year end 2014 the one IRA was worth 500k. Calculations result in distributions above required budget needs (this will just supplement thehousehold budget so I want the smallest to meet my goal).
My understanding is that I just use the 2014 YE value of the total IRA. Am I correct in thinking I cannot split the IRA post-2014 and base my 72t calculation off of the smaller account? For example, in 2015 split into 2 IRA’s (300/200) and use the 200k value for calculations? Thank you for any help.2015-01-13 16:40, By: Drew, IP: [22.214.171.124]
L2: 72t when divorce is involvedSince the IRS has not always been consistent with respect to divorce related letter rulings, it is best to avoid involving the SEPP in the settlement until after the plan has ended. Obviously, that is often not possible.
The general trend is that the IRS will not bust the plan if a logical and consistent approach is taken with respect to the plan. Two such approaches that have been approved in past PLRs are the plan originator simply continuing the same distributions as if nothing had happened. If that is acceptable, so would applying the one time switch to the RMD method to reduce that calculation considerably. But the IRS has also approved a pro rated reduction based on the % of the IRA balance transferred to the other spouse. Lose half your IRA, then reduce your SEPP distributions by half. If you opt for this, better to reduce the distribution starting the next calendar year following the partial IRA transfer. This is apparently what you prefer to do. Keep good documentation regarding the transfer and add it to your initial documentation. You should also add an explanatory statement to the first tax return reporting the reduced amount (if you pro rate) explaining the reason for it.
Note that it is very possible that recent PLRs that I am unaware of has altered the above approaches. If so, hopefully someone will comment.
2015-01-14 02:05, By: Alan S,, IP: [126.96.36.199]
L3: 72t when divorce is involvedI do not know, but the spouse might also be required to continue the distributions on her part of the SEPP account. If so, I don’t know if one of them busting their plan would then also bust the other person’s.
I agree with Alan that there are too many unknowns to make this a preferred approach. All other options should be pursued first.2015-01-14 16:17, By: dlzallestaxes, IP: [188.8.131.52]
L4: 72t when divorce is involvedI am still a little confused on one point: let’s assume the client rolls over a QDRO into an IRA in 2015. They then want to set up a 72-t. Does the value of the account for calculation need to be the value at the end of 2014, or can we use something like the first IRA brokerage statement (whether it is Jan, Mar, etc. after the funds have been moved) as the basis for the calculation.2015-01-15 14:38, By: Drew, IP: [184.108.40.206]
L5: 72t when divorce is involvedIf the client is the alternate payee (recipient) of the QDRO, penalty free distributions can be taken directly from the employer plan segregated account. That said, if the former spouse is still working there and not eligible for distributions, the segregated account may not be either. But it is worth checking the direct distribution options as a 72t plan could be avoided.
With respect to your question, you can use any valuation date, usually a month end statement for the 72t calculation using the IRA. Be sure that the rollover is entirely complete, eg no trailing dividends to follow. No contributions or distributions can be taken from the IRA between the date of the opening balance and the start of the plan.
2015-01-15 16:26, By: Alan S., IP: [220.127.116.11]
L6: 72t when divorce is involvedIt is my understanding that QDRO’s only apply to Employer’s Qualified Retirement Plans, i.e Defined Benefit, Defined Contribution, 401-K, 403-B, ESOPs, and money-purchase plans, but not to IRAs. It is best to do a trustee-to-trustee transfer, because otherwise if a “rollover” is done, the IRS requires a 20% withholding of federal income taxes, even though the rolled over distribution isn’t taxable. However, since “rollovers” must be 100%, the shortfall caused by the 20% withholding becomes taxable income, unless you replace that 20% from other funds. Also, subsequent distributions from the IRA may be subject to the 10% early distribution penalty if the recipient is < 59 1/2. IRAs can be split between a taxpayer and spouse in any agreed ratio pursuant to a decree of divorce or separate maintenance (or a written instrument incident to the decree). It is not a taxable event to either spouse. It is best to do a trustee-to-trustee transfer to the spouse's IRA. (By the way, IRA distributions or 'rollovers' are not subject to the same 20% withholding as from employer plans.)2015-01-15 19:08, By: dlzallestaxes, IP: [18.104.22.168] L6: 72t when divorce is involvedThank you to all who have provided information and answers to these questions.2015-01-15 22:44, By: Drew, IP: [22.214.171.124]