Did I bust my SEPP?
L1: Did I bust my SEPP?8 years ago I set up my SEPP. I am currently 58 years old. When I set up my SEPP, I invested the money in one single IRA. Within that IRA, I was invested in 2 separate mutual funds. I was receiving my 72t distribution from mutual fund #1. I was not receiving any distribution frommutual fund #2. Mutual fund #2 was doing so poorly, that I moved it over to a CD (in November of 2008). My question is, did I bust my plan? Am I liable for the penalty?Istill haven’t received any distribution from the CD. Your help is much appreciated!2010-11-02 22:05, By: Jennifer, IP: [126.96.36.199]
L2: Did I bust my SEPP?Is the CD in the same IRA account that held the funds (eg broker sold CD), or did you transfer it to a new IRA account with a bank?2010-11-02 22:17, By: Alan S., IP: [188.8.131.52]
L2: Did I bust my SEPP?Maybe yes and maybe no. There have been a few PLRs that have been issued that have deemed a partial transfer of assets a change that resulted in a busted SEPP. The problem is that the IRS has never really stated why they considered the partial transfers a modification to the plan. If you get audited and the IRS presses the same logic, then you may have a problem. With that said, I am also sure that there have been a lot of SEPP plans that have done partial transfers that have not been the subject of an audit. You very best bet may be to talk to your tax consultant, explain the problem and hope that they know something about SEPP plans.
Perhaps you can offer more details in terms of the type of account, etc. Alan’s question is a really good one.2010-11-02 22:22, By: Gfw, IP: [184.108.40.206]
L3: Did I bust my SEPP?I moved it to a CD at the bank. So yes, that would be considered a separate IRA. So now I have 2 IRA’s.2010-11-02 22:36, By: Jennifer, IP: [220.127.116.11]
L4: Did I bust my SEPP?Then gfw has addressed the issues with partial transfers. The overwhelming odds are that you will be OK, better if you did a direct transfer than a 1099R reported rollover, but would not lose any sleep over it.
In this situation, better not to do anything else with your current return that might trigger an audit.2010-11-03 00:48, By: Alan S., IP: [18.104.22.168]
L5: Did I bust my SEPP?I am thinking about combining the 2 separate IRA’s into one IRA with a different broker. This would essentially put me back to where I was before I moved the one IRA over to a bank CD. I think this would allow me to rest easier. Your thoughts?
2010-11-03 16:39, By: Jennifer, IP: [22.214.171.124]
L6: Did I bust my SEPP?I would wait until January so that it is in a different calendar year than the other moves. I have a vague reco;l;ection that there may be a restriction that you can only make 1 such transfer within any 12 month period ( not calendar year), and therefore you might have to wait until 12 months after you set up the first CD.2010-11-03 17:09, By: dlzallestaxes, IP: [126.96.36.199]
L7: Did I bust my SEPP?Where can I go to confirm that 12 month rule?
2010-11-03 18:29, By: Jennifer, IP: [188.8.131.52]
L8: Did I bust my SEPP?IRC (internal Revenue Code) 408(d)(3)(b) states that IRAs (but not qualified plans, like 401-k) are limited to a single tax-free rollover in any 365-day period from any single account. This 1-year waiting period applies from the date the first IRA withdrawal is made, rather than the date it is rolled over (within 60 days) to another IRA account, and applies separately to each IRA account owned by a taxpayer.
Trustee-to-trustee transfers of IRA funds are not considered to be “rolloevers”, and such a transfer is not counted for the 365-day waiting period between IRA rollovers. ( IRS Revenue Ruling 78-406)
Technically, a “rollover” is one where the check is drawn by the financial institution to the taxpayer, who then either endorses it for deposit at another financial institution into anpther IRA account, or deposits it in his regular checking account and then writes a check to another financial institution to deposit into another IRA account within 60 days of the date of the initial check that he received.
This is why we always recommend doing trustee-to-trustee transfers.
HOWEVER, this does not necessarily solve the SEPP 72-T “partial transfer” issue that the IRS has refused to clarify.
2010-11-03 21:36, By: dlzallestaxes, IP: [184.108.40.206]
L9: Did I bust my SEPP?In my case, all moves have been made trustee to trustee (no check has been payable to me). Does that mean that the one year rule would not apply to me? I would really like to move these two IRA’s together with a new brokeras soon as possible so I can rest easier. You guys are awesome by the way with all of the help you have given me!2010-11-04 13:26, By: Jennifer, IP: [220.127.116.11]
L10: Did I bust my SEPP?>>Does that mean that the one year rule would not apply to me?Not if all previous transfers were done on a direct transfer basis.
>>so I can rest easier.You aren’t really resolving the problem, it appears that you are merely hoping to hide it. Remember, that each time you transfer, there is a 1099 issued so the IRS already has records of your previous transfer and it will get more if you transfer it again. If you do, you will have 2 partial transfers instead of just 1.2010-11-04 13:45, By: Gfw, IP: [18.104.22.168]
L11: Did I bust my SEPP?This should not be an issue because the “Direct Rollover to an IRA” should be coded as a “G”, not a “1” or “2” code anyway on the 1099-R.2010-11-04 14:16, By: dlzallestaxes, IP: [22.214.171.124]
L12: Did I bust my SEPP?Dlz… my only point is that the reporting occurs so that there is a record of the transaction – I wasn’t really concerned with the actual code, just the reporting.2010-11-04 15:50, By: Gfw, IP: [126.96.36.199]
L13: Did I bust my SEPP?A 1099R must always be issued for a direct transfer from a qualified plan to an IRA, BUT an IRA to IRA direct transfer is not reportable for either a 1099R or a companion 5498. (Ref Inst for 1099R, p 4 “transfers”.
Occasionally, an IRA custodian will issue a 1099R in error, and that can cause the taxpayer headaches in showing the IRS that such distribution was NOT an indirect rollover. But this is very infrequent.
Doing direct transfers will eliminate the red flag 1099R forms that might result in the IRS noticing the movement of funds, but as gfw noted, in the unlikely case the IRS would bring up the partial transfer issue again, whether the funds moved via transfer or rollover is immaterial. The problem is that they moved. And if they moved in either fashion, that move will not be erased by re combining the accounts. But it should be noted that if the funds are re combined, any year end 5498 will not show the year end value change for the original account that could be significant if the funds remained partitioned in two accounts. Thus, a minor plus for recombination.
Another factor toconsider is that even if you move the funds in a non reported transfer, if you later take a 72t distribution from the new account, the IRS might notice the change in account numbers on the 1099R that is issued. Again, this is unlikely but possible.
In summary, the chance of a problem is very slim (2 cases out of many thousands in the last 3 years). But if such a transfer is made, that risk can further be reduced by:
1) Doing a direct non reportable transfer
2) Taking all 72t distributions from the original IRA only.
3) Not doing anything else on your return that might trigger an audit.
2010-11-05 03:28, By: Alan S., IP: [188.8.131.52]
L14: Did I bust my SEPP?Reviewing your original post …
8 years ago I set up my SEPP. I am currently 58 years old. When I set up my SEPP, I invested the money in one single IRA. Within that IRA, I was invested in 2 separate mutual funds. I was receiving my 72t distribution from mutual fund #1. I was not receiving any distribution frommutual fund #2. Mutual fund #2 was doing so poorly, that I moved it over to a CD (in November of 2008). My question is, did I bust my plan? Am I liable for the penalty?Istill haven’t received any distribution from the CD. Your help is much appreciated!
1. Since you are 58 and really close ending your SEPP Plan at age 59 1/2, seriously consider leaving everything alone until your plan does terminate. I knowyou think you will “feel better” by moving the two IRA’s to a third location, but the potential problems you may create may exceed the problems you now have with the current configuration, and your negative feelings may increase.
2. Since you are considering moving your first / distribution mutual fund to a new account, you have the problem of “trailing dividends & capital gains” to deal with. If you make the transfer to the third account and the first account generates “trailing distributions” which will follow into the new, third account, you now have to deal with adding new funds to the SEPP IRA account which would be a bust.
Personally I would “gut it out” until your plan is complete at your age 59 1/2, afterwhich you can do whatever you wish with your assets. By not making any more changes and waiting the IRS out, you will probably be better off than creating more moving parts which may attract more attention than you can live with.
Jim2010-11-23 16:22, By: Jim, IP: [184.108.40.206]
L15: Did I bust my SEPP?I agree with the recommendation to not create any more partial movement of funds on top of any earlier partial transfers.
But point 2 should not beconstrued as creatingnew contributions to a SEPP account. Any trailing distributions should just add to the non reported originaltransfer, but even if the receiving fund issued a 5498 in error, it should show as a rollover contribution and not a regular IRA contribution.
In addition, funds generally have a schedule for when cap gain distributions and dividends are issued, so timing the transfer to avoid these scheduled distributions should eliminate any secondary transfers. You cannot always avoid the unscheduled distribution, but you can really reduce the odds by being aware of the fund distribution schedule.
But I do concur with Jim’s advice to wait it out considering the total past, present and future situation with respect to this SEPP.2010-11-23 19:23, By: Alan S., IP: [220.127.116.11]