A partial IRA transfer currently using Rule 72(t) led to another predictable result for an IRA who was ignorant of IRA rules.
In another one of those “gotcha it’s too late” situations with the IRS, the service in PLR 201323045 has ruled again (and has ruled in the past) against an IRA owner that had a current 72(t) distribution plan in place. The IRA owner modified that IRA by doing a partial IRA transfer. And by modifying it (“busting it”), penalties were assessed on all the income taken to that point.
What is a 72t Plan Again?
If you already know what 72(t) is (or now that you know after reading the above references), and more and more people do these days as QUALITY OF LIFE increasingly supersedes climbing to the top of the corporate ladder on people’s priority lists, here’s the scoop.
Normally, when taking a 72(t) distribution option, one chooses from 3 payout choices. Along with those choices come some other rules (e.g. plan has to be in place for 5 years or to 59 1/2, whichever is longer, payments can’t be adjusted, and others). Furthermore, the IRA holder is also forbidden from modifying the 72(t) or the 72t will be BUSTED and you will owe big. How big? Normally, Rule 72(t) allows an IRA owner to take money out of an IRA before age 59 1/2 without penalties (gotta still pay those taxes though). However, if the distribution is busted, all penalties that would have been owed without 72(t) in force, become due. And for some people, who have taken out money under a 72t plan for multiple years, this can be a huge hit.
Partial IRA Transfer is a “Modification” of a 72t Plan
You can not modify an IRA while under a 72t distribution plan. Modifications fall under many categories. But in the case of this ruling, it was a partial transfer. Interestingly, you can do a full transfer (which I have done for clients) while under 72t. A full transfer is not a modification of the plan. It’s simply a change of custodian. A partial IRA does change the plan as now the 72 is based on smaller principal.
What Can We Learn From This?
Lesson: talk to a qualified advisor with IRA experience (a CPA, a financial planner, a tax attorney etc) before making any major moves with qualified money (pre- tax money). At least to hear them out on your options. If you could use a decent second opinion, feel free to contact me (Chris) using my contact form HERE.
More costly IRA 72t mistakes:
For further reading, we have just finished our 2016 Top IRA Law Changes Report. We are getting that ready. While waiting for us to prepare that, read my favorite year for IRA rulings top 5 changes here:
Want the 2016 version? It brings 5 new top rulings that anyone with serious money shouldn’t miss. Have a question? Contact us HERE and we will help if we can.