Enhancing income from an IRA with 72(t)

L1: Enhancing income from an IRA with 72(t)My client has had a 72(t) arrangement for a couple of years, and is looking tobuy a carwith a lump sum from this account. Since I don’t want to disturb the current 72(t) payments, can I arrange for a partial rollover from her current IRA to another IRA with another custodian, and then make the distribution from the new IRA? Does the IRS consider the lump sum distribution as a violation of the 72(t) even though the 1099s issued by the 1st custodian would not change from one year to the next?2005-12-06 10:19, By: Ron, IP: [65.75.17.45]
L2: Enhancing income from an IRA with 72(t)Hi Ron:
Any movement of funds into or out of any IRA’s which are part of the 72(t) / SEPP Plan universe will constitute an illegal action or busted plan. Partial transfers are reported to the IRS on Form 5498 by the custodian making the partial transfer out and another is reported by the gaining custodian.
Have your client look under other rocks for the funds to buy the car.
Jim2005-12-06 10:31, By: Jim, IP: [70.184.1.35]

L2: Enhancing income from an IRA with 72(t)Thanks, Jim. I was afraid that’d be the answer. My only other strategy would be an idea piuckup up from an earlier post. This 72(t) is currentll being paid monthly, so in January I might simply change the mode (frequency) of the payment, and take a full annual amount, at least getting her what she needs for a car ….but then she has no inome…..2005-12-06 10:43, By: Ron, IP: [65.75.17.45]

L2: Enhancing income from an IRA with 72(t)Changing modes of distribution will get her a pile of cash to buy a car, but as you pointed out she then has an income problem. This would be exchanging one problem for a new problem. If she can go back to work for a yearto make up the lost income, then your idea might make sense. Lacking any other sources of income for the rest of the year I would still suggest looking for altermatives to fund the car purchase.
Good luck.
Jim2005-12-06 10:54, By: Jim, IP: [70.184.1.35]

L2: Enhancing income from an IRA with 72(t)Partial transfers are reported to the IRS on Form 5498 by the custodian making the partial transfer out and another is reported by the gaining custodian.
Technical correction: Form 1099R is used by the distributing custodian and 5498 by the recipient custodian.2005-12-07 20:34, By: Alan S., IP: [24.116.165.157]

L2: Enhancing income from an IRA with 72(t)Ron:
Any movement of funds between IRAs should be processed using “trustee-to-trustee” methodology.
Alan:
Thanks for your input about reporting. After some research with one of my custodian companies, let me offer the following info. Since GFW is in the custodian business, he may want to add some much appreciated information.
Form 1099R is used to report distributions from an IRA when the IRA owner has “constructive receipt” of the funds. This occurs with 72(t), total and partial distributions from the IRA. If the IRA owner deposits part or all of the distributed funds into a new IRA within 60-days of actual receipt, then the new IRA custodian reports receipt of the funds on Form 5498. The IRA owner has to report the distribution and taxable amount on page one of Form 1040.
HOWEVER, when a “trustee-to-trustee transfer” occurs, the losing custodian does not generate a Form 1099R. Like in the 60-day rollover example above, the gaining custodian reports a contribution on Form 5498.
But the question is, how does the IRS match things up when there is a “trustee-to-trustee transfer” and no Form 1099R is generated? The answer is like I originally posted … sort of. Both the losing and gaining custodians file Form 5498, but you are correct that the form does not indicate any distributions from the losing custodian. The answer to the riddle is a back-door reporting that only the IRS could think of by reporting end of the year values.
The losing custodian reports an end of year value of zero, and the gaining custodian reports the actual end of year value of the new IRA. The old custodian has no money, and the new custodian now has money where it didn’t exist last year.
Gordon and Bill and others, feel free to add your thoughts.
Jim2005-12-08 13:54, By: Jim, IP: [70.184.1.35]

L2: Enhancing income from an IRA with 72(t)I just want to clarify something that I have seen in a couple separate replies. A trustee to trustee transfer from IRA to IRA is NOT a reportable event. A transfer does not get reported on Form 54982006-01-12 20:36, By: Birdman, IP: [63.103.206.10]

L2: Enhancing income from an IRA with 72(t)Good morning, Birdman:
Thanks for your input, but I can only agree partially with your comment that:
A transfer does not get reported on Form 5498
If you re-read my post just before yours, I refer to the reporting on Form 5498 for trustee-to-trustees as “back-door reporting” of this event.The losing custodian reports the end of year “Fair Market Value” of the account in Block 5 of Form 5498 which will be zero. Likewise the gaining custodian reports end of the year “Fair Market Value” the following year. This is the “reporting” that I am referring to.
For the benefit of those not familiar with Form 5498, follow this link to the IRS web site and the form with it”s instructions:
http://www.irs.gov/pub/irs-pdf/f5498.pdf
In my original post I was not quite accurate about the reporting but I thank Alas S for his inputs. I think I have it right now.
Jim2006-01-13 09:01, By: Jim, IP: [70.184.1.35]