No IRA modification penalty where additional funds withdrawn for education
L1: No IRA modification penalty where additional funds withdrawn for educationA big change… A recent tax court case – Benz (2009) 132 TC No. 15 – has concluded that additional distributionsfrom an IRA SEPP planthat meet the education exemption will not trigger a modification of the SEPP distributions and therefore does not bust theplan – no 10% penalty tax.
It basically stated that a distribution that satisfies the statutory exception for higher education expenses in not a modification of substantially equal payments.
My initial thoughtis that the IRS may re-test at its earliest convenience2009-05-12 14:25, By: Gfw, IP: [184.108.40.206]
L2: No IRA modification penalty where additional funds withdrawn for educationGordon:
Did the rulling only apply to the education exception or did it address the other three exceptions also? If not, how long do you think it will take for them to include all 4 exceptions since they fall into the same basic framework?
Jim2009-05-12 14:37, By: Jim, IP: [220.127.116.11]
L3: No IRA modification penalty where additional funds withdrawn for educationONLY HIGHER EDUCATION EXPENSES.2009-05-12 14:43, By: dlzallestaxes, IP: [18.104.22.168]
L3: No IRA modification penalty where additional funds withdrawn for educationIt only included higher education. While it is a tax court case, don’t think the IRS will merely give in and accept as OK in the future. Anyone who uses this case for their planning, may be in for a surprise – it all depends on the attitude of the IRS.
If I were setting up a plan today, I would do it using the only 2 exceptions for a SEPP planare death and disability and plan for an other exceptions outside the SEPP plan.2009-05-12 16:22, By: Gfw, IP: [22.214.171.124]
L4: No IRA modification penalty where additional funds withdrawn for education” The Tax Court observed that the last sentence of Code Section 72(t)(2)(E) recognizes that an employee may qualify for more than one statutory exception to the 10% additional tax (penalty). It provides that the amount of distributions attributable to higher education expenses does not take into account, among others, distributions described in Code Sec. 72(t)(2)(A), which includes the periodic payments exception. Accordingly, the Tax Court held that a distribution that satisfies the statutory exception for higher education expenses is not a modification of a series of substantially equal periodic payments. Because it found that a distribution for higher education expenses is not a modification, the 5-year rule prohibiting modifications except in the case of death or disability was not violated.”
If the IRS is not successful in overriding this ruling, I would expect the other similar exceptions would likewise not violate or “bust” a SEPP.
However, not trusting the IRS or the courts, I agree with GFW that it would be more prudent to fund a SEPP only with the minimum needed, and keep the balance of your IRA accounts for future emergencies.
But, if you do not have those extra funds available, and you start a SEPP, you at least know that there is a possibility that youmight be able totake more than your SEPP annual payment if you satisfy another exception, even though the IRS might challenge it. At least this approach would be less expensive than getting a PLR, especially because the Tax Court ruling is on your side, and the IRS would have to fight that.2009-05-12 16:38, By: dlzallestaxes, IP: [126.96.36.199]
L5: No IRA modification penalty where additional funds withdrawn for educationI think that rulings like this and thepartial transfer bust two years ago are indications that the IRS needs to release some Regulations on SEPPs. Right now anumber of rulings are tied together by a common thread and then out comes a bizarre ruling like these two, one to benefits taxpayers and the other that potentially could hurt thousands of taxpayers. Taxpayers deserve better than this when they are putting their retirement dollars at risk, and should not be made subject to rulings that the IRS cannot even explain upon receiving a logical inquiry. Meanwhile, about 3 years ago, letter rulings on this subject became became very costly, over $10,000.
As gfw indicated, the logical approach remains the most conservative one in setting up and executing these plans.
2009-05-13 03:07, By: Alan S., IP: [188.8.131.52]