Deposits After Establishing 72t
L1: Deposits After Establishing 72tMy wife retired in 2008 and took her pension and 401k as lump sums and did an institutional rollover to her IRA with Morgan Stanley. She started her 72t in May 2008.
This past week she received a check for $51.73 made out to Morgan Stanley for the benefit of my wife. The check is a result of her former employer doing a recalculation of her pension.
If she deposits this check in her IRA does this bust her 72t?
Appreciate any feedback. Love your web site…great information.2009-03-23 16:52, By: RetiredBob, IP: [22.214.171.124]
L2: Deposits After Establishing 72tRetired Bob,
From what I have read on this site, you do not want to add $$ to an IRA that is being used in a72t. Is it possible to return the check to them, and have them reissue the check directly to her alone, so she can cash it,and then planondeclaring it on the 2009 tax return, and also paying the 10% penalty on the $51? They probably ssued it in that format based on the original reqest for lump sum payout. If they can reissue it to her directly after you explain the serious consequences for your wife of it being added to her existing (72t) RA, you would also want to ask if they willissue a separate 1099-R for this $51 so it is not coded as a rollover- if it happens in same year as the direct rollover occurred, justto keep from muddying the water at year end 2009. Just my (non-professional) thoughts on this problem. The other option is to give them back the check, and tell them that you want the entire $51 check cancelled and not reissued, and she will sign a waiver, declining theadditional money. KEN2009-03-23 17:55, By: Ken, IP: [126.96.36.199]
L3: Deposits After Establishing 72tHello Retird Bob:
Your circumstance is commonly called “trailer monies” & financial institutions are well aware of these situations. The correct action is to deposit these funds into your wife’s current IRA account specifically telling the current institution that it is trailer money; e.g. a transfer and is not a 2009 contribution.
The incorreewct action would be to cash the check as it would actually be considered an additional 2009 distribution which can cause nothing but headaches.
2009-03-23 20:53, By: TheBadger, IP: [188.8.131.52]
L4: Deposits After Establishing 72tI believe the following portion of the 1.402(c) IRS Regs serves as the basis for treatment ofthese trailer payments:
Q6: What types of variations in the amount of a payment cause the payment to be independent of a series of substantially equal periodic payments and thus not part of the series?
A6: (a) Independent payments. Except as provided in paragraph (b) of this Q&A, a payment is treated as independent of the payments in a series of substantially equal payments, and thus not part of the series, if the payment is substantially larger or smaller than the other payments in the series. An independent payment is an eligible rollover distribution if it is not otherwise excepted from the definition of eligible rollover distribution. This is the case regardless of whether the payment is made before, with, or after payments in the series. For example, if an employee elects a single payment of half of the account balance with the remainder of the account balance paid over the life expectancy of the distributee, the single payment is treated as independent of the payments in the series and is an eligible rollover distribution unless otherwise excepted. Similarly, if an employee’s surviving spouse receives a survivor life annuity of $1,000 per month plus a single payment on account of death of $7,500, the single payment is treated as independent of the payments in the annuity and is an eligible rollover distribution unless otherwise excepted (e.g., $5,000 of the $7,500 might qualify to be excluded from gross income as a death benefit under section 101(b)).
(b) Special rules(1) Administrative error or delay. If, due solely to reasonable administrative error or delay in payment, there is an adjustment after the annuity starting date to the amount of any payment in a series of payments that otherwise would constitute a series of substantially equal payments described in section 402(c)(4)(A) and this section, the adjusted payment or payments will be treated as part of the series of substantially equal periodic payments and will not be treated as independent of the payments in the series. For example, if, due solely to reasonable administrative delay, the first payment of a life annuity is delayed by two months and reflects an additional two months worth of benefits, that payment will be treated as a substantially equal payment in the series rather than as an independent payment. The result will not change merely because the amount of the adjustment is paid in a separate supplemental payment.
(2) Supplemental payments for annuitants. A supplemental payment from a defined benefit plan to annuitants (e.g., retirees or beneficiaries) will be treated as part of a series of substantially equal payments, rather than as an independent payment, provided that the following conditions are met
(i) The supplement is a benefit increase for annuitants;
(ii) The amount of the supplement is determined in a consistent manner for all similarly situated annuitants;
(iii) The supplement is paid to annuitants who are otherwise receiving payments that would constitute substantially equal periodic payments; and
(iv) The aggregate supplement is less than or equal to the greater of 10% of the annual rate of payment for the annuity, or $750 or any higher amount prescribed by the Commissioner in revenue rulings, notices, and other guidance published in the Federal Register. See 601.601(d)(2)(ii)(b) of this chapter.
(3) Final payment in a series. If a payment in a series of payments from an account balance under a defined contribution plan represents the remaining balance to the credit and is substantially less than the other payments in the series, the final payment must nevertheless be treated as a payment in the series of substantially equal payments and may not be treated as an independent payment if the other payments in the series are substantially equal and the payments are for a period described in section 402(c)(4)(A) based on the rules provided in paragraph (d)(2) of Q&A5 of this section. Thus, such final payment will not be an eligible rollover distribution.
The b(1) special rule describes the posted situation and it appears that even though the check is not in a form that can be cashed, the spirit of this ruling seems to imply that it can be either rolled over to the 72t IRA account or could be re issued without having any negative effect on the 72t plan. Granted, this IRS Reg mainly addresses substantially equal distributions directly from QRPs.
Bill, is there some other IRS ruling that ties these trailer payments to IRA SEPP distributions, or is this ruling the extent of IRS advice on the matter?
2009-03-23 22:39, By: Alan S., IP: [184.108.40.206]
L4: Deposits After Establishing 72tBadger,
Based on the responses there seems to be a difference of opinion. Going by majority rules, it seems like the wife should go ahead and deposit the check in her 72t IRA but make sure the custodian understands this is “trailing funds” and not a contribution. This should not jeopardize her 72t?
Thanks2009-03-25 19:34, By: RetiredBob, IP: [220.127.116.11]