Advanced Underwriting Consultants

Question of the Day – June 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client, who is now 57, has been taking 72(t) distributions from his IRA for the past four years.  May the client do a rollover from that IRA to a different custodian without endangering the 72(t) payments?

Answer: Maybe, but the IRS hasn’t said for sure one way or the other.

The Internal Revenue Code provides that taxable distributions from an IRA to a taxpayer younger than 59 ½ are subject to an extra 10% penalty tax unless there is a special exception.  One such exception is that the 10% penalty tax does not apply to distributions which are part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the individual or the joint lives or joint life expectancy of the individual and his designated beneficiary.  This is sometimes referred to as the 72(t) exception.

Once a taxpayer begins to take 72(t) distributions, the taxpayer must continue them for the longer of five years or until the taxpayer reaches age 59 ½.  If the taxpayer modifies the 72(t) distribution stream—perhaps by taking greater or lesser distributions from the IRA than those required under the 72(t) distribution strategy—all prior distributions intended to meet the 72(t) requirements will be subject to the penalty tax.

The IRS has ruled in Revenue Ruling 2002-62 that doing a partial rollover from the IRA from which 72(t) distributions are being made during the 72(t) distribution period is considered a modification.  That ruling was silent on the effect of a complete rollover on the 72(t) payments.

Logic would seem to support the idea that a complete rollover would not be considered a material modification of the 72(t) payment stream, especially in light of the fact the IRS didn’t explicitly say it was in the Revenue Ruling.  This logic would seem to hold together best if the complete rollover is done by direct rollover instead of 60 day rollover.

However, logic doesn’t always win the day.  The client and his tax advisor should be warned about the uncertainty before the rollover is begun.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.