Change of custodians for 72t

You are here:
< Back

L1: Change of custodians for 72tHello. I have a question that I can’t seem to find a definitive answer on so I’m hoping someone has dealt with this.
Here is the situation:
Client has a 72t variable annuity account with company A. Client has been taking 72t withdrawals for three years and is not happy with the current custodian and wants to move to another variable annuity company.
By switching companies, the client will be penalized by her current custodian but will receive a bonus which will increase her starting account balance with the new company/custodian. She will continue to make withdrawals of the same amount that she has received for the last three years and use form 5329 to notify the IRS that this is a continuation of her 72t.
Will the increase in her account balance created by the receiving custodians bonus cause this to be considered a “modification” and therefore bust her 72t? If so, is it even possible to switch custodians for a 72t account?
Thanks in advance.2010-05-19 18:33, By: luckydoc, IP: []

L2: Change of custodians for 72tThe bonus will not bust the plan since it is not a contribution made by the IRA owner. It would be analagous to an investment gain for any holding in a 72t IRA account. Therefore, there should be no problem in changing custodians. If possible this should be done by a direct trustee transfer rather than an indirect rollover so that the one rollover option can remain open if needed for some reason. It should also eliminate having to report a rollover on line 15 of Form 1040 because the transferred amount should not be shown on the 1099R issued by the first custodian.And yes, she will probably need a 5329 for one or more 1099R forms issued to claim the SEPP exception to the penalty.2010-05-20 03:57, By: Alan S., IP: []

L3: Change of custodians for 72tAlan:I agree with you that the “bonus” should be treated as “gain” and not a “new contribution,” but the real question is how the losing annuity company will treat the CDSC (penalty) when their contract is surrendered. The question that should be directed to the losing company is the following:”Will the CDSC charge upon surrender be treated as a distribution and reportedas part of the total Form 1099-R amount, or will it be treated as “account loss” and not reported on Form 1099-R?”However, before initiating this transfer action the rep should contact both the gaining and losing annuity companies to determine exactly how each will treat the CDSC and bonus situatioins as to IRS reporting. Document the answers as the to date, time and person spoken to at each company, and get them to send a written response supporting what they said to ward off future potential problems.Jim2010-05-20 13:36, By: Jim, IP: []