Rollover of periodic payments from IRA

[Guest philc]

Individual (age 51) is receiving periodic payments from their IRA in order to satisfy the exception from the 10% tax under 72(t). They now want to roll over the remaining amount in their IRA to a 401(k) and received advice that as long as they continued with the series of periodic payments they could - just include as ordinary income and no 10% penalty.

I can't find where this would be prohibited (unlike the prohibition of periodic payments qualifying as an eligible rollover distribution from a qualified retirement plan) but if they did do this, all distributions made in the form of the periodic payments prior to age 59 1/2 would now be subject to the 10% penalty (and ordinary income). Am I correct? Anything else?

[Guest RobO]

philc

I'd say that this would break the 72(t)....Please refer to Rev Rul 2002-62. Sec 2.02(e) "Changes to account balance. Under all three methods, substantially equal

periodic payments are calculated with respect to an account balance as of the first

valuation date selected in paragraph (d) above. Thus, a modification to the series of

payments will occur if, after such date, there is (i) any addition to the account balance

other than gains or losses, (ii) any nontaxable transfer of a portion of the account

balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount

received resulting in such amount not being taxable."

I think (ii) applies to your client

[Guest RobO]

Sorry....sent the last post before I was finished.

If they were to transfer the balance of the account to the 401(k), the 72(t) would be considered to be broken, so all payments taken previously would be subject to the 10% penalty, and penalties due for prior year withdrawals would also be subject to interest.

[Appleby]

Sorry....sent the last post before I was finished.

If they were to transfer the balance of the account to the 401(k), the 72(t) would be considered to be broken, so all payments taken previously would be subject to the 10% penalty, and penalties due for prior year withdrawals would also be subject to interest.

I see your point RobO…but an argument could be made for the other POV, which is, the rollover is allowed, providing the assets are maintained in a separate account-, from which the 72(t) is continue and not commingled with any other assets. I base my reasoning on the following:

1. A traditional IRA that is part of a 72(t) program can be converted to a Roth IRA. The 72(t) payments must continue from the Roth IRA. This is not considered a modification, even though it is defined as a distribution and rollover.

2. Generally, a 72(t) distribution can occur from a qualified plan only after the participant has separated from service. However, the IRS recently issued guidance providing that rollover assets are not subject to the timing requirements for distribution purposes of non-rollover plan assets. ( see Rev. Rul. 2004-12)

What do you think?

Note: In spite of my explanation above, I am not convinced that it can or cannot be done.

[Belgarath]

Appleby - I like your reasoning on this. But personally, I'd be hesitant to apply it - although what you say is very logical, I think, it nevertheless violates the plain language of the regulation. At least IMHO. I'd want a private letter ruling if 'twas me, or at least some assurance from the Service from the podium at some public forum...

[jevd]

You may wish to check out some of the posts on 72t.net.

They have addressed this issue as well.