L1: Custodian ChangesI believe I already know the answer to this, but wanted to check again. I have a new client who has been taking 72(t) distributins for 4 years now. The client is extremely unhappy with the current advisor who works for a very large and well known firm and wanted to transfer everything to my independent RIApractice. To my knowledge, as long as the distributions remain the same we can establish a new traditional IRA and complete an account transfer formwith the intentions ofre-allocating the portfolio according to the client goals and risk tolerance. Am I correct in this notio that we can change investments and custodians/advisors as long as the client distributions remain the same until the end of the 5 year period?
The reason I ask is because the client has been told for years by the current advisorthat he/she is not allowed to move the money from his company for 5 years no matter what. The client is not in any type of annuity or investment with deferred sales charges and believe the advisor is just trying to hold onto his fees, as it is a fairly large account. Can you please confirm this idea and also point me towards any “official” documents that state it is okay to move to a new custodian/advisor? Thank you all very much in advance!2010-09-22 19:42, By: None, IP: [184.108.40.206]
L2: Custodian ChangesThe only limitation that I am aware of is the one concerning “PARTIAL TRANSFERS”. Since you are talking about a FULL TRANSFER, I do not think that there is any problem.
I think that your comment about the current broker is correct. Have the client ask that broker for documentation of his position.
Excuse the pun, but this sounds like a “restraint of trade”.2010-09-22 20:03, By: dlzallestaxes, IP: [220.127.116.11]
L2: Custodian ChangesSounds like a self serving warning from the advisor.
There is no problem doing a total transfer of the IRA account to a new custodian. The old custodian will show Code 1 on the 1099R if they are not doing that already.
There have been a couple unexplained IRS letter rulings (see PLR 2007 20023 topic on this site) busting 72t plans for partial transfers, ie taking a portion of the IRA account and transferring it to a new custodian). While this is probably an aberration, it should still be noted. But there have been no problems with total transfers. It is best to do this by direct trustee transfer rather than indirect rollover.
Most of the less prominent characteristics of 72t plans have been documented in IRS Notices and letter rulings. Notice 2002-62 indicates that a 72t plan cannot be transferred to another retirement plan. This accepted interpretation of this statement is that the account cannot be transferred to another TYPE of retirement plan, ie IRA to 401k or vice versa. IRS Regs clearly indicate that a Roth conversion from one type of IRA to another type is NOT a problem for a 72t plan. In summary, the conclusion that a total tranfer is OK is based on IRS acquiesence to thousands of these transfers without a problem, and rulings in which transfers were a part of the activity, and they have not been questioned.
Therefore, your impression is correct. Client should take extra care to set up the new IRA account such that careful attention is paid to the total amount of distributions for the calendar year of the transfer. Added activity does increase the risk that a related execution error could occur, but the total transfer itself is not a problem.
2010-09-22 20:03, By: Alan S., IP: [18.104.22.168]
L3: Custodian ChangesWhy would the old custodian show code 1 on the 1099? Shouldnt 72(t) distributins show code 2?2010-09-23 16:37, By: None, IP: [22.214.171.124]
L4: Custodian ChangesMost all custodians code the 1099 with a code other than ‘2’ and expect you to file a 5329 to claim the exemption.
In the case where they are transferring assets to another custodian, they have no clue as to the actual status of the plan after the transfer and even if they were coding a ‘2’ before, won’t after. 2010-09-23 16:47, By: Gfw, IP: [126.96.36.199]