SEPP and IRA Transfers

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L1: SEPP and IRA TransfersI have a question in regards to transferring money from an IRA that has SEPP monthly payments already established. Our client has an IRA with Custodian X (all mutual funds) where she set up 72t about 8 months ago. She would like to transfer a portion of the IRA to another custodian Y which would be invested in an annuity contract with a GMIB rider (still within an IRA vehicle). Would this transfer affect her current 72t distributions in regards to the 10% early tax? She would leave enough money in her current IRA to satisfy the 72t distributions until the later of 5 years or 59 1/2. Also, if she can transfer a portion of her IRA to another custodian (for the annuity), could she then take the 72t from the annuity or would she still have to take the distributions from the initial IRA?I would think the transfer wouldn’t be a problem, however I came across a PLR that basically said it couldn’t be done.I would appreciate anyone’s help for this particular situation.Thank you very much.Jason2008-10-23 07:20, By: jabar, IP: []
L2: SEPP and IRA TransfersGood afternoon Jason:The answer to your question is, “Well, maybe.” I’ll let Alan S reply on the PLR since he’s really up on that quirky littlething. I will address the planning logic of making the transfer rather than letting it remain in the existing account. I’ll assume the mutual fund account is “held direct” with the mutual fund company and not held in a brokerage account which can also hold individual stocks, bonds and other investments, including annuities. If it’s in a brokerage account, try buying the annuity there.While you can have more than one IRA account that makes up the “SEPP Universe,” and you can take distributions from one or all of the accounts, the problem is will the distribution account remain alive and well during the distribution period, especially given the current market conditions. (We are getting more posts asking about switching to the RMD method to reduce required distributions due to the falling stock market. You might want to read some of those.)Let’s assume you have $400,000 in the mutual fund account and you’re taking 5% or $20,000 per year for SEPP payments. Now don’t go running the SEPP calculator on this example but just follow along with me. Assume you want to move 50% or $200,000 into the annuity, and you plan to continue withdrawing the required $20,000 per year from the mutual fund account which will now be 10%. You have accelerated the withdrawal rate on a smaller corpus which, along with a receeding stock market, will only accelerate depletion of the mutual fund IRA. At some point you will be forced to begin early withdrawals from the GMIB annuity due to the exhaustion of the mutual funds. Depending on the terms of the annuity and rider, this may be disasterous for your client.Personally, I would look for another investment option to limit stock market exposure rather than using the GMIB annuity option.Jim2008-10-23 11:24, By: jim, IP: []

L3: SEPP and IRA TransfersJim,Thank you for your quick response. The current IRA mutual fund account under the 72t distributions is held directly with the fund company. If we were to transfer a portion of the account to the annuity, the amount remaining in the IRA mutual fund account would be plenty to cover the remaining 72t distributionsfor the greater of 5 years or 59 1/2. I understand yourexplanation of withdrawing money from a smaller corpus with deteriorating market conditions would accelerate the depetion of the mutual fund IRA, however if we were to calculate the client’s remaining distributions under 72t for the greater of 5 years or 59 1/2 andput that money into a money market fund within the mutual fund IRA, there there would bea very small chance of us running out of money to complete the mandatory 72tdistributions. However, would theamount being transferred to the annuity affect any portion of the current 72t distribution calculations? I beleive that is my main question. Also, what would the affects be if money was transferred to the qualified annuity contract and then distributions were taken from the annuity? Can the distributions be switched from the mutual fund account to the annuity contract since the 2 separate investment vehicles were only 1 when the initial 72t calculation was made?We are not too worried about the stock market exposure on the annuity since it grows at a 6% compound rate less any withdrawals and we expect the market to return little if any gains in the near term and this is only a portion of the client’s total portfolio.Thanks for your help Jim!2008-10-23 12:43, By: jabar, IP: []

L2: SEPP and IRA TransfersJim,I sent an earlier reply but it looks like it didn’t go through. Thanks for your quick response. I guess my main question is if the client initially has 1 mutual fund IRA (held directly through the fund company) and calculates 72t distributions, can a portion of this account be transferred to a qualifed annuity contract without affecting the 72t distributions and 10% penalty tax. Upon the transfer to the annuity, there would be enough money left in the initial mutual fund IRA account to cover the remaining 72t distributions up to 5 yrs or 59 1/2 whichever is longer. However, would the transfer of some of the mutual fund IRA disqualify the 72t distributions?Also, if the initial mutual fund IRA account were split into 2 qualified accounts (same mutual fund IRA and annuity contract), can the 72t distributions be transferred from 1 vehicle (mutual funds) to the other (annuity) without any disqualification? Even though you now would have 2 different qualified vehicles, initially they were 1 when the 72t calculations were made.Thanks for your help!JasonJason2008-10-23 13:42, By: jabar, IP: []

L2: SEPP and IRA TransfersJason,The PLR that you and Jim were referring to is PLR 2007 20023 which you can review if full detail elsewhere on this site.The short answer to your question is that you would most likely be OK with the partial transfer in spite of the PLR, where a similar transfer busted the plan. The reason you are probably OK (but no guarantee) is that there has been no IRS follow up with thousands of others that are done these transfers. In addition, the IRS was not able to provide a lucid answer to the inquiry that “TheBadger” requested on why they ruled as they did in the PLR. Accordingly, the PLR appears to be an aberration at this point, although no one can say for certain that there will not be more problems, therefore the qualifying “probably” will be OK is the best we can do at this point. In the circumstances posted, it does not matter which IRA supplies the SEPP distribution as that was not material to the PLR. It is more likely that a 5329 will be needed to claim the exception if one is not needed now, asthe distributing custodian will probably code the distribution as “early”. A 5329probably does not increase thechancesof an inquiry appreciably, but it isstill better to get the exception coding.In summary, the risk is not great, but the reward should be worth whatever small risk is assumed by making the partial transfer.2008-10-23 14:45, By: alan+s., IP: []

L2: SEPP and IRA TransfersAlan,Thank you for your information.It is my understanding the main thing to worry about if the client transfer a portion of her current mutual fund IRA to a qualified annuity contract is how the disbursing custodian codes the transfer. If they code it correctly as one with an exception, nothing else should need to be done. However, if the code it as an early distribution, we would have to have the client complete IRS form 5329 to request an exception to the 10% penalty. Is that correct?Also, it sounds as if it doesn’t really matter which IRA account (initial mutual fund IRA or future qualified annuity contract) the distributions are taken from so long as the correct amount is taken each year. Is that correct?Thanks again for your help and insight.Jason2008-10-23 15:23, By: jabar, IP: []

L2: sepp+and+ira+transfers%3cbr%3estart+by+preparing+your+client+that+there+is+a+99%25+chance+that+he+will+be+completing+form+5329%26nbsp+and+that%26nbsp+the+irs+has+recently+ruled+adversely%26nbsp+against+one+partial+transfer+so+he+may+(or+may+not)+be+in+the+same+situation.+%26nbsp+%3cbr%3e%3cbr%3eif+the+decision+is+made+to+do+the+partial+transfer%2c+make+sure+that+you+have+documented+every+possible+event+to+your+client+-+if+something+goes+wrong%2c+it+will+be+between%26nbsp+your+client+and+the+irs%2c+but+there+is+also+a+99%25+chance+that+you+will+also+be+included%2c+at+least+by+your+client+looking+for+a+resolution+so+make+sure+that+there+is+a+%22real%22+reason+to+transfer+funds+to+an+annuity.%26nbsp+%26nbsp+2008-10-23 15:44, By: gfw, IP: []

L2: SEPP and IRA TransfersJabar,My read on this (and I’m not an expert) is that not too many custodians will offer the code “2” that you desire from the beginning, and even if the client’s custodian did say it would issue the 1099-R with code 2 when this was set up (you also may not even know yet– since it has only run for 8 months, so no 1099-R yet on this SEPP) this changewill most likely cause them to err on the side of caution and issue a code “1”, which is what Vanguard website tells everyonethey will use on any SEPP plan, andthatcauses the need to file5329, where the person receiving the early IRA money (and not the custodian) stipulates that there is an exception to the penalty, If your client moves some of theSEPP universe to another “custodian”, I would assume any hopeof a code “2” from origianl custodian would be dashed, as they would then likey cover themselves with a code 1′” on the 1099-R. I fill one out each year for my Vanguard SEPP. I am not commenting on whether the transfer keept the SEPP valid. JMHO. KEN2008-10-23 15:51, By: ken, IP: []

L2: SEPP and IRA TransfersI just spoke with an estate planning attorney in our home office and he basically said we should be able to do the transfer with no problem as long as we maintain the original 72t distribution amount regardless of what IRA accounts it comes from (1/2 from IRA and 1/2 from annuity or any combination thereof). We also must have the client complete form 5329 and file with her tax return each year which is basically what everyone here has said.Thanks for all of your help! I truly appreciate everyone’s input.Jason2008-10-24 08:56, By: jabar, IP: []