Advanced Underwriting Consultants

Question of the Day – May 19

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: I have a 55 year old client who is taking 72(t) distributions from his IRA to avoid the 10% penalty tax on early distributions.  May the client do a partial rollover of the IRA without invalidating the 72(t) distribution strategy?

Answer: No.

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.  And that’s usually a bad tax result for the taxpayer—and the taxpayer’s advisor.

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.