Satisfy 72t and 10% penalty calculation
L1: Satisfy 72t and 10% penalty calculationWe have a client that started a 72t on a NQ annuity. He has 3 years remaining on the distributions. After reading through some of the articles/ notes/ comments on the website I am going to assume the clientCANNOT “carve out” any monies from the annuity contract (transferring funds to a new NQaccount) leavingenough in the contractwhich would satisfy his 72t distributions (since the 72t payments included the entire contract balance at the time the payments were calculated/ started). If he did this I am assuming he would be open to a penalty from the IRS. Correct?
In the case of a NQ Annuity…which amount does the IRA use to calculate the 10% penalty….1.) contributions, 2.) gain over contributions, or 3.) contract accumulated value?Thank you,Ed
2008-08-05 10:13, By: Ed, IP: [184.108.40.206]
L2: Satisfy 72t and 10% penalty calculationGood afternoon Ed:
As to your first question, any additions to or subtractions from the a SEPP Plan “universe” constitutes a “busted plan.” In this case, 72(q) is the controlling section for NQ annuities. Both 72(t) and 72(q) work the same way in this situation. 72(t) deals with pre-taxplans and 72(q) deals with after-tax plans.
The answer to your second question is Option 4 … the penalty is assessed on the total amount distributed from the SEPP Plan. However, youdoraise another question which I am not sure about the answer, so hopefully TheBadger or GFW will comment.
Since a NQ annuity has basis, which isthe total amount invested into the contract,is there any relief ifany of your distributions include some of your basis? I have never thought about this situation so I”m not clear on the answer. Bill, Gordon, what say you?
Jim2008-08-05 11:24, By: Jim, IP: [220.127.116.11]
L2: Satisfy 72t and 10% penalty calculationFor purposes of the 10% penalty, only the gain distributedis subject to the 10% penalty.
With that said, to the extent that there was any gain in the contract when the distribution were made, the distributions would be made first fromthe gain and only then from the basis. Depending on the contract, the net result would be that the 10% may very well apply to all previous distributions.
2008-08-05 12:56, By: Gfw, IP: [18.104.22.168]
L2: Satisfy 72t and 10% penalty calculationGentlemen-
with all that being said (and I am not certain what the client wants to do)…is there a particular IRS form/ publication we should access to understand this better and to maybe process the 10% penalty?
Thank you,Ed2008-08-05 13:06, By: Ed, IP: [22.214.171.124]
L2: Satisfy 72t and 10% penalty calculationBased on the following conclusion in IRB 2004-9, it appears to me that a taxpayer could do a full or partial 1035 exchange of the NQ annuity used for a 72q plan without busting the plan. Essentially this is tantamount to doing an IRA transfer into a new account that would be eligible for inclusion in the SEPP universe, only in this case it would be a new NQ annuity account. In this release the IRS seems intent on handling these retirement vehicles in uniform fashion. Thereare also specific rules for transferring the appropriate amount of basis to the new account when a 1035 exchange is done, although the gains would still be taxable on a LIFO basis as Gordon indicated.>>>>>>>>>>
APPLICATION OF NOTICE 89-25, AS MODIFIED BY REV. RUL. 2002-62, TO SECTION 72(q)(2)(D).
The IRS and Treasury believe that, when the provisions of 72 are intended to address different concerns with respect to the treatment of qualified and non-qualified annuities, it is appropriate to apply those provisions in a different manner. However, if the provisions of 72 are designed to achieve the same purpose whether or not the annuity is qualified or non-qualified, it is appropriate to apply that provision in the same manner to both qualified and non-qualified annuities.
The current language of 72(q)(2) derives from 1123(b)(2) of the Tax Reform Act of 1986, Pub. L. No. 99-514, (the 1986 ActÛ). The legislative history relating to the 1986 Act’s amendments to 72 indicates that Congress intended that the additional income tax on early withdrawals should be the same for all tax-favored retirement savings arrangements and should be increased so that the additional tax serves, in most cases, to recapture a significant portion of the benefits of deferral of tax on income. See H. Rept. No. 99-426, 99th Cong. 1st Sess. 703-04 (1985), 1986-3 C.B. (vol. 2) 703-04; S. Rept. No. 99-313, 99th Cong. 2d Sess. 567 (1986), 1986-3 C.B. (vol. 3) 567.
The IRS and Treasury believe that because these provisions were enacted for the same purpose it is appropriate to apply the same methods to determine whether a distribution is part of a series of substantially equal periodic payments. Therefore, taxpayers may use one of the methods set forth in Notice 89-25, as modified by Rev. Rul. 2002-62, to determine whether a distribution from a non-qualified annuity contract is part of a series of substantially equal periodic payments under 72(q)(2)(D). >>>>>>>> >>>>>>>>>>>>>2008-08-05 18:58, By: Alan S., IP: [126.96.36.199]
L2: Satisfy 72t and 10% penalty calculationI forgot to add to the prior post that this assumes that PLR 2007 20023 is an aberration, as it COULD apply to a partial 1035 exchange of a 72q account in the same fashion as a partial IRA transfer. However, since no follow through or explanation from the IRS, the amount of risk of this PLR seems to be vastly diminished.2008-08-05 19:02, By: Alan S., IP: [188.8.131.52]