Rejection for 72t from IRS
L1: Rejection for 72t from IRSMy wife took an early distribution of her IRA at age 59, six months shy of the required age. Our Financial Advisor told her that under the rules of 72t, she would not have to pay the 10% penalty. First thing that happens, the Insurance Company holding the funds put the wrong number in box 7 of her 1099r. Since then IRS sent us a letter saying that we owed the 10% plus tax and interest from 2007. We called the Life Insurance Company and they refuse to change the 1099r. They say it is company policy.
We had our Financial Planner compose a letter to the IRS explaning that my wife took an early distribution under rule 72t, and that she was taking the same yearly amount out for the next five years.
What else can we do to avoid paying the penalty? IRS sent us a list of exceptions that were alowable and they were Death, disability, equal payments over lifetime,deferred annuity contract before August 14, 1982, personal injury settlement, under immediate annuity contract, or under a deferred annuity contract purchased by your employer upon termination of a qualified plan. This is all they say they will accept. There was no mention of equal payments oover a five year period.
We went to a professional first instead of trying to do it ourself and still got screwed. We took out the annuities in 2005, and would have gladely waited 6 more months until my wife was 591/2. We went for our yearly meeting with the Financial Planner and he inisted that we could go ahead and take the money at age 59. He cited theIRS 72t plan which would make us exempt from the 10% penalty. Now we get the letter from the IRS saying “No Way, you owe several thousand dollars and we want it now.
We called an IRS agent, and explained everything to her, and she said that we were eligable for the 72t. At the end of the conversation, she told us that another agent might see it another way and charge us the penalty. So I guess it is who you talk to, if you get a jerk then you loose.
Any solutions would be greatly appreciated. We went to an accountant, that told us we would have no problems, but go ahead and pay the penalty and get IRS off of our back.2009-07-31 18:21, By: Grandpagator, IP: [220.127.116.11]
L2: Rejection for 72t from IRSBefore we can offer an intelligent response, we need some specific information.
1. Your wife’s birthdate.
2. Date of your wife’s first distribution from the IRA.
3. Value of the IRA and the date of valuation, and the interest rate used to calculate the annual distribution amount. Do you have copies of the documents used to calculate your wife’s distribution amount? This site has the calculators you would need so with this information we should be able to determine if you even had a valid plan to start with.
4. Distribution method used: Amoritzation, Annuitization or RMD.
5. Date of the demand letters from the IRS. You have a limited time to respond to these letters. Also, how many letters have you received and the dates of those letters.
6. Is your financial planner also either a CPA, Enrolled Agent (EA) or tax attorney? Since 72(t) is a “tax issue,” you probably need the assistance of one of these types of people to help solve your problems and respond properly to the IRS. Unfortunately, not all of these types of folks really understand 72(t) so you have to find the right person, some of which are active on this board.
Up until a couple of years ago the IRA custodian would code Box 7 ofForm 1099-R with a “2” which was the exception code. Today most use “Code 1” which stands for “Early distribution; no known exception” and would only apply to any distributions prior to your wife’s age 59.5. You solve this problem by filing IRS Form 5329 with your normal tax return to claim the 72(t) exception.You should be getting a “Code 7” on all distributions after her age 59.5, but you still have to comply with the 5-year rule to have a valid 72(t) plan. By the way, the “equal payments over lifetime” you referred to in the IRS letter refers to 72(t).
If you will answer the elements I have laid out above then I think we can give you some help. I will be off this board until next Monday morning, but some of the others may be able to respond to you this weekend.
Jim2009-07-31 19:18, By: Jim, IP: [18.104.22.168]
L3: Rejection for 72t from IRSJim,
I think we are in real trouble here. The things you are asking for, we have never heard of. Our financial planner is not a CPA, Enrolled Agent, or a Tax Attorney.
1. Your wife’s birthdate. 10/23/48
2. Date of your wife’s first distribution from the IRA. September 2007
3. Value of the IRA and the date of valuation, and the interest rate used to calculate the annual distribution amount. Do you have copies of the documents used to calculate your wife’s distribution amount? This site has the calculators you would need so with this information we should be able to determine if you even had a valid plan to start with. Date of Valuation, unknown. Rate of Calcuattion, unknown. We have no paperwork at all.
4. Distribution method used: Amoritzation, Annuitization or RMD. unknown All we know is that Allianz give us 10% of the $350000.00 This is what our Financial Planner recommended.
5. Date of the demand letters from the IRS. You have a limited time to respond to these letters. Also, how many letters have you received and the dates of those letters. The latest demand letter from the IRS has to be answered by August 8th, 2009.
When we got the first letter, we called our Financial Planner, and he told us to send a short not to the IRS saying that we qualify persuant to IRS code 72t, and then he said we should Hope For The Best! Right then a flag went up with us. Hope For he Best?? When we received the Reject letter, we again called our Financial Planner, and he was out of town for a week. We left several messages for him to call us upon his return. He called us this morning, and could not understand why the IRS denied our claim. We asked him if we met all the requirements and he told us that the only requirement was to take the same amount out for a five year period. He made no mention about any other requirements. However, he did E-mail us a letter to send to the IRS along with our reply. Here is aportion of the letter, leaving out his personal information.
This letter is to confirm that _________SS#_________ has taken equal yearly distributions from her two 72t IRA accounts with Allianz Insurance Company, starting in 2007, and will continue for the required five years. I feel that all requirements for not incuring the 10% Early Withdrawel Penalty have been met. If there is any other information that you may need, please don’t hesitate to call me at ___ ___ ____.
From your information and questions, it appears he does not know what he is doing with this 72t. We were in his office on the speaker phone, the day he called Allianz, and they said nothing about any calculations. He told them 10%, and that he wanted to make sure we would not incur the 10% penality as she was not 591/2. They told us that everything was fine. When we received the 1099 for Allianz, they had box 7 with a 1. He called Allianz again while we were in the office. They told him that 1 is always what they put in that box, and they refused to re-issue another corrected 1099.
Where do you think we should go from here? We are both retired and I am on Workers Compensation from the Postal Service. We barely get along with what we are getting from Allianz. I don’t know where we are going to come up with the $300.00 for IRS. With out orignal amount, it looks like we are getting a lot from Allianz every year. We only get the $9000.00 to live on. The $20000.00 we get, he had us take out 2 insurance policies on our children. So each year we have to send them $10000.00 for each child.
What a Mess we have gotten ourself into.
Thanks for you quick responce.
2009-07-31 21:35, By: Grandpagator, IP: [22.214.171.124]
L4: Rejection for 72t from IRS1. It seems to me that the “financial planner” doesn’t have a clue what a SEPP 72-T is.
2. The fact that he said you could take 10% without penalty sounds like an annuity. Did he buy you an annuity within your IRA, or an annuity not in your IRA ?
3. I don’t think any “professional” would have recommended starting a SEPP 72-T for someone who is just short of 59 years old. I think he was more interested in his large commission for the life insurance policies and the annuity than “advising you” or doing any planning. ( It sounds like he SOLD you whole-life policies, which have the highest commissions.)
4. Since it sounds like you do not have a SEPP 72-T anyway, I suggest that you are probably better off that you don’t have one. Pay the 10% penalty on the 2007 distribution. If you took the 2008 distribution after 4/23/2008 you would not have any penalty because IRA distributionbs after 59 1/2 are not subject to the 10% penalty. So the 2008 distribution, and 2009, and future years, would be subject only to income taxes.
5. DEMAND a meeting with the office manager of the firm the “financial planner” works for, and Allianz, with a qualified attorney accompanying you. DEMAND that THEY reimburse you for the IRS penalty ( $ 3,500 not $ 300, which might have been a typo).
6. Meet with a QUALIFIED financial planner to see if there is any reason for you to have the life insurance policies on your children. If not, cancel those policies, and DEMAND a refund of the insurance premiums paid. I would tell them that if they refuse to do any of this, you will report them to the SEC, Insurance Commission of your state, and the State and Federal attorney generals. If the annuity is not appropriate, then demand that the contract be voided, and your money refunded.
7. After you get all of your money back, I would see if the attorney will let you still report the “financial planner” to the authorities to save the rest of the world from what appears to be an incompetent person.2009-08-01 04:29, By: dlzallestaxes, IP: [126.96.36.199]
L5: Rejection for 72t from IRSDlz… 100% agreement, especially with points5,6 & 7 and if the “financial planner” is NASD licensed, also include http://www.finra.org/index.htm- FINRA is the successor to the NASD.
Alianz may not be responsible for theSEPP plan, but they must have licensed the”financial planner” and accepted the business – they as a company have some responsibility – there is a word called “suitability”. I’m sure that they are very familiar with the term.
2009-08-02 00:42, By: Gfw, IP: [188.8.131.52]
L6: Rejection for 72t from IRSGfw,
I guess we have really been taken for a ride. I have tried to check our Financial Planner out, but can’t find any information on him. His letterhead does not give us any clue as to what kind of liscense he has or does not have. He is the President of his own Financial Services Company. I know for a fact, he does not conduct any business with Allianz now. That may be the reason our phone calls to Allianz are nto being returned. We are locked into Allianz for 10 years.2009-08-02 03:17, By: Grandpagator, IP: [184.108.40.206]
L7: Rejection for 72t from IRSStart by contacting thestate insurance department in the state where you reside – the “financial planner” must have been licensed to sell the insurance policies that you purchased – the insurance department will contact Alianz and Alianz will have to respond to them.
I would also direct a carefully worded letter directly to the legal department ofAlianz outlining what you have outlined here. Use words like “suitability”. If you don’t feel comfortable writing the letter, hire an attorney.
Alianz has a good name and I’m sure thatthey will be willing to work with you for a solution. 2009-08-02 09:07, By: Gfw, IP: [220.127.116.11]
L8: Rejection for 72t from IRSYep, it sounds like you have a mess! But all is not lost.
Like DLZ stated, you only have early distribution penalty liability for any distributions prior to your wife’s age 59.5. If youwithdrew $35,000 during this time then the penalty is $3,500 plus interest which the IRS will calculate. I agree with DLZ that you don’t have a 72(t) so pay the penalty and move on to the bigger fish you haveto catch inthis case.
You will need a good CPA with great experience with 72(t) and I would suggest Bill Stecker who posts here as TheBadger. Send Bill an e-mail firstname.lastname@example.org he will respond. You will probably need an attorney and Billshould be able to recommend one.
Check the status of your “financial planner” in the FINRA site at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm You will load in his name, town and state and you will find out current and past status. From what you have written I suspect that your advisor may not be current or may have been at one time but now is not; maybe by personal choice or by FINRA legal actions. This link will tell you what’s going on. If your advisor was securities licensed at one time and engaged in activities as you have described, then I suspect he’s been kicked out of the industry.
Next, contact your state insurance commissioner and do a similar search for your adivsor. They will tell you his status and any actions taken or pending. As above I suspect you will find some negative information on file with the state.
My guess, again from what you have said, is that your “advisor” is currently only licensed for insurance, not securities,and he has sold you a fixed or EIA annuity. The 10% withdrawal rate he said was “OK” would refer to the maximum, penalty freeannual withdrawal allowed by the annuity contract with Allianz, which has no relationship to 72(t) requirements. I would say your advisor was looking for a way to fund two large, life insurance policies ($10,000 premium per year) and not how to help you with your retirement needs. By the way, why do you need such large insurance policies on your kids anyway? Aren’t your children on their own and taking care of their own responsibilities in the arena of life insurance and other expenses? My guess is he was trying to stay below the annual gift exclusion by setting the premium at $10,000 per year per child. So what was his logic in having you buy these policies? Like GFW said, “suitability” appears to be gravely lacking in this case!
At this point you should terminate any future meetings with this “advisor” or Allianz until you have established a relationship with a qualified CPA, like Bill Stecker,and an attorney with experience suing insurance companies. I think you have a good case and should go for it!
Jim2009-08-03 14:32, By: Jim, IP: [18.104.22.168]
L9: Rejection for 72t from IRSHi Jim,
I really appreciate all the information you have given me.
I contacted FINA and the Florida State Insurance Comission, and there is not any record of this guy or his business. This does not surprize me at all. Is there any other place I can look him up? His title is “Financial Advisor” Is there a web site for this type of business? aybe I should look under SCAM in the dictionary?
Grandpagator2009-08-03 18:48, By: Grandpagator, IP: [22.214.171.124]
L10: Rejection for 72t from IRSSend his name address and phone number to the state insurance department along witha summary of what you posted. He had to be licensed or Alianz would not have accepted the applications. 2009-08-03 18:57, By: Gfw, IP: [126.96.36.199]
L10: Rejection for 72t from IRSIf he is in a city near you, see if the local police are interested in proceeding with a case for fraudulent misrepresentation. Also, contact the state attorney general.
If you do not need the life insurance policies on your kids, cancel them, and get you cash surrendr value back. Then contact the life insurance company to refund all of the premiums, or else you will contact the state insurance commissioner and the newspapers.2009-08-03 18:58, By: dlzallestaxes, IP: [188.8.131.52]
L9: Rejection for 72t from IRSJim,
I did not answer the last part of your question. His reasoning for the Life Insurance Policy on my kids, was that it would leave something for the Grandkids and that we could draw out money and not pay taxes on it.
Could he be working under someone elses liscense? Is that allowable? I know contractors do that all the time.
I don’t understand why I can’t find anything about him with the State of Florida and FINRA.2009-08-03 19:58, By: Grandpagator, IP: [184.108.40.206]
L10: Rejection for 72t from IRSStart with Alianz legal department – they know who he is – they know who wrore the policies.
Then take out you policies (I hope you at least have the policies that you traded $350,000 and $20,000/year) and look at the signature. I believe in Florida, theagent’s license number must (by Florida law) be include on the application.
2009-08-03 20:26, By: Gfw, IP: [220.127.116.11]
L11: Rejection for 72t from IRSI did a search on Bing and came up with the following information.
Allianz Life Insurance Company of North AmericaPO Box 1344Minneapolis, MN 55416-1297 Telephone: 800.950.5872
I called the number, asked for the legal department and got right through. Now it is up to you!2009-08-03 20:35, By: Gfw, IP: [18.104.22.168]
L10: Rejection for 72t from IRSDisregard all of DLZ’s last post! The local police won’t touch this case and neither will the local media. Do not “cancel the insurance for the surrender value” since the policy is too new to have much if any surrender value. Besides, you want the policy to be “in force” when the correct authorities come down on his head.
The State of Florida Insurance Commissioner’s office is the correct entity to investigate and prosecute this case, based on the information you have provided. Get back with their office and have them open an official inquiry into this guy. Like GFW stated, he must be properly licensed by the State of Florida and properly appointed by Allianz in the State of Florida to sell their products. Be sure you give the Insurance Commissioner’s office copies of your policies, including the application which is part of the policy, and any annual statements you have. They will be able to determine if hewas licensed at the time of sale. Let the Insurance Commissioner investigate this since it sounds like you have apotential case of fraud. Again, and I’m sorry DLZ, but his last post is not the route you want to follow.
His reasoning for the Life Insurance Policy on my kids, was that it would leave something for the Grandkids and that we could draw out money and not pay taxes on it.
This sounds like double-talk to get you to buy two large insurance policies, like I said earlier. Who’s going to pay the premiums when you and your wife die, and your kids have many more years until they die before your grandkids receive the benefit of these policies? And once you and your wife die what’s to keep your kids from surrendering the policies for the cash value? And you can draw money out and not pay taxes? That means you can create a loan against the cash value of the policy, which reduces the death benefit that your grandchildren would eventually receive. Remember when GFW mentioned “suitability?” Based on what you have told us I would say that this was a totally “un-suitable” sale.
Try contacting Allianz again and find out if this guy was a licensed agent with them on the day of the sale for all products … annuity and life insurance policies. You, and maybe your wife, are the owners of the annuity and life insurance, and Allianz will have to give you this information. Look at the applications and see who signed them as “Agent.” Is it the same guy you’re talking about now? Then go to the State of Florida Insurance Commissioner with this information.
DON’T make ANY threats of suing either Allianz or the agent at this time. Get all or your ducks lined up and let your attorney take the appropriate legal actions. Once you tip your hand to Allianz or the agent that you are considering legal action, they’ll clam up and you want to keep the lines of communication open at this point. In fact, once the Insurance Commissioners office gets involved they should move the ball forward to get this resolved. Of course, your attorney will want to monitor them to be sure they are rolling the ball in a timely manner.
Jim2009-08-03 20:33, By: Jim, IP: [22.214.171.124]
L11: Rejection for 72t from IRSJim,
We are going to take your advice and gather up everything we have and take it to an atorney.
One question that has bothered me from the get go on this 72t. Why would the IRS want the different calculations on early withdrawel before 59 1/2? I could see it if you were going to pay equal payments over a lifetime, you could run out of money. But, I can’t see the reason, if we are only going to pay the same amount for just five years. Allianz is not going to let you take out more than 10% anyway.. I just don’t get that one? I did go back and look at my 2007 tax return, and I did fill out a 5329 and in the box I had a 2.
Grandpagator2009-08-05 15:41, By: Grandpagator, IP: [126.96.36.199]
L12: Rejection for 72t from IRSAlianz only allows 10% because they need to recover the commissions that they paid to the agent. At any rate, what they allow has no relationship to a SEPP plan – it merely makes the annuity more marketable then if no withdrawals were allowed and any withdrawals were subject to a surrender charge.
There are 3 possible methods that can be used for a SEPP plan and each calculates the payment as if it would be paid out over the owner’s remaining life expectancy. However, these payments can be stopped at the later of 5 years or age 59.5. 2009-08-05 15:54, By: Gfw, IP: [188.8.131.52]
L13: Rejection for 72t from IRSRevenue Rulling 2002-62 laid out the rules for operating SEPP Plans under 72(t) and 72(q). In short a valid plan must run for 5 years of distributions AND the recipient must have passed their age 59 1/2. If you will use the Calculators on this website you will have a compliant plan. You must enter the IRA account starting balance and an “allowable,reasonable interest rate.” This “allowable, reasonable interest rate” is the stumbling block for many people, and I think you are in that category. You are looking for 120% of the Federal Mid-term Rate (FMR), which is available on this site.
Since your wife’s plan had it’s first distribution in September, 2007, then you may use the 120% FMR for either July or August, 2007, for your calculations. Don’t try to put logic to it … that’s just the way it is, like why did Congress set age 59.5 for the early withdrawal age and 70.5 for the Required Minimum Distribution (RMD) age. But that’s a discussion for another time.
So to further answer your quandry, the max interest rate for July, 2007, is 5.96% and for August, 2007, it’s 6.13%, neither of which is anywhere close to the 10% your advisor told you that you could use.
Go to the upper left corner of this page and explore “Interest Rates” and “Calculators” and thingsshould become clear for you.
As a reminder, since your wife is only subject to the Early Withdrawal Penalty for any withdrawals between her age 59 and 59.5, you will be better off to pay the penalty and interest to the IRS, and then make any withdrawals she wishes now since she is past age 59.5. I know it hurts to pay the IRS, but in your case this is the cheapest and simplest way to settle your case with the government. Don’t let the last response date on your latest IRS letter pass without action.
Now, go after this guy.
Jim2009-08-05 16:28, By: Jim, IP: [184.108.40.206]
L14: Rejection for 72t from IRSJust a comment on the “10%” figure you mention as not even being close to the allowable rates… I submit that you are talking apples and oranges.
I am not a pro but did a lot of research on 72t two years ago before I started one.
The 10% used for the erroneous withdrawal amount has nothing to do with the IRS allowable interest rates! This advisor apparently said he could withdraw 10% of the balance each year – not that he could use 10% as the IRS allowable interest rate. The fact that the IRS allowable rates at the time werenot close to 10% is irrelevant.
IRS allowable interest rates are used to set the allowable rate of return on the principal over the expected lifetime of the recipient. This amount then determines the allowable withdrawal rate so the money theoretically runs out at the time you die using the allowable rate of return and allowable withdrawal amount. People in the past were using much higher expected rates of return which allowed much higher distributions, and then the money ran out becasue the returns were not realized. Uncle Sam stepped in to “help”us use “reasonable” rates so we wouldn’t run out of money.
This is my understanding from my research and would like to hear from anyone who has a different takeon this.
Thanks – Scott2009-08-05 17:12, By: Scott, IP: [220.127.116.11]
L15: Rejection for 72t from IRSLet’s talk about your fruit salad.
1. If an IRA invests in an annuity, and the annuity allows it, th IRA can withdraw 10% a year from the annuity into the IRA as CASH FLOW.
2. If the IRA is part of a SEPP 72-T plan, then this cash can be used for the distributions, or to replace cash used from the IRA for the distribution. The SEPP 72-T distribution is based upon a calculation, which has nothing to do with the annuity investment within the IRA.
3. The fact that you can withdraw 10% from the annuity into the IRA as no bearing on how much you can withdraw from the IRA under a SEPP 72-T plan.
The fact that someone does research does notmean that they understand the research that they have done. Often a professional is needed to understand technical topics, or at least understanding the information on a list-serve devoted to the topic, like taxes or SEPP 72-T plans.2009-08-05 17:59, By: dlzallestaxes, IP: [18.104.22.168]
L15: Rejection for 72t from IRSScott:
Let me applaude you for doing your research before starting your SEPP Plan. This is not rocket science but it does require some dedicated research and question asking to be clear how to set up a compliant SEPP Plan, and it sounds like you have accomplished the task. I agree … basically … with your comments, but let me add some clarification to some of your statements to clarify my comments.
“Just a comment on the “10%” figure you mention as not even being close to the allowable rates… I submit that you are talking apples and oranges.” I agree; the 10% distribution the advisor said was allowable has no relationship to the allowable 72(t) rates. The advisor was simply using the “10% free withdrawal” allowed by the annuity contract so he could fund the large, life insurance policies. So you are right; the allowable rate for the SEPP Plan is the apple and the annuity free withdrawal rate of 10% is the orange.
“I am not a pro but did a lot of research on 72t two years ago before I started one.” You done good!
“The 10% used for the erroneous withdrawal amount has nothing to do with the IRS allowable interest rates!” I agree. See above.
“This advisor apparently said he could withdraw 10% of the balance each year – not that he could use 10% as the IRS allowable interest rate.” Disagree. Re-read the third post in this string, especially the following:
“This letter is to confirm that ________SS#_________ has taken equal yearly distributions from her two 72t IRA accounts with Allianz Insurance Company, starting in 2007, and will continue for the required five years. I feel that all requirements for not incuring the 10% Early Withdrawel Penalty have been met. If there is any other information that you may need, please don’t hesitate to call me at ___ ___ ____.”
Since the advisor states that in his opinionthe distribution in question DOES qualify for the 72(t) exception, and since he used a 10% withdrawal rate as justification, then you have to conclude that the advisor incorrectly used 10% inhis “calculations” … whether he actually did any calculations or not … to determine that the distribution was compliant with 72(t) requirements.
“The fact that the IRS allowable rates at the time werenot close to 10% is irrelevant.” On the contrary. The fact that the IRS allowable rates at the time were not close to the 10% used by the advisor is at the heart of the problem … except of course that it appears the advisor was simply trying to make a huge commission on the sale of the annuity and the two life insurance policies and that’s a second major problem.
Those are my thoughts.
Jim2009-08-05 21:42, By: Jim, IP: [22.214.171.124]