News & Information

 

FEATURED PRODUCT

CCH's Law, Explanation and Analysis of Health Care Reform Legislation
Get full explanation and analysis of every aspect of health care reform legislation. These legislative changes will imminently impact thousands of employers, private insurance providers, and the Medicare and Medicaid programs. Pre-order today and save $20!

Learn More »

CCH® PENSION AND BENEFITS — 08/03/09

Trustee-to-trustee transfer of portion of IRA to new IRA after substantially equal periodic payments had begun was modification of substantially equal periodic payments

A trustee-to-trustee transfer of a portion of an individual's account balance in her IRA to another IRA at a different financial institution after she had begun receiving a series of substantially equal periodic payments was a modification to the series of substantially equal periodic payments that triggers the 10% additional tax on early distributions, according to an IRS letter ruling.

An individual, who was age 56, maintained an IRA from which she had been receiving distributions for several years that were intended to be a series of substantially equal periodic payments as described in Code Sec. 72(t)(2)(A)(iv) and that were calculated using the fixed amortization method as provided in IRS Notice 89-25. In order to convert part of her account balance in the IRA from equities to cash because of market downturns, she moved a portion of her IRA account balance along with her entire balance in a second IRA, via trustee-to-trustee transfer, to a new IRA at a different financial institution that would allow her to invest in certificates of deposit. Afterwards, she was informed that the partial transfer caused a modification of a series of substantially equal periodic payments and would result in a 10% additional tax for early distributions.

The IRS noted that Code Sec. 72(t)(2)(A)(iv) provides an exception to the imposition of an additional 10% tax on early distributions under Code Sec. 72(t)(1) for distributions that are part of a series of substantially equal periodic payments made for the life (or life expectancy) of an IRA owner or the joint lives (or joint life expectancies) of the IRA owner and the designated beneficiary. However, under Code Sec. 72(t)(4), if the series of payments is later modified (other than by death or disability) before the later of the IRA owner's attainment of age 59½, or the close of the five-year period beginning with the date of the first payment and after the owner attains age 59½, the IRA owner would face additional taxes for the first taxable year in which the modification occurred equal to the tax that would have been imposed without the exception provided in Code Sec. 72(t)(2)(A)(iv), plus interest.

IRS Notice 89-25 provides guidance on a number of issues, including the acceptable methods of calculating substantially equal periodic payments. IRS Rev. Rul. 2002-62, which modifies Notice 89-25, provides that, under all of the acceptable methods, substantially equal periodic payments are calculated as of the first valuation date selected. A modification to the series of payments will occur, if after the first valuation date, there is, among other things, any nontaxable transfer of a portion of the acount balance to another retirement plan.

The IRS explained that the trustee-to-trustee transfer from the first IRA to the new IRA at a different financial institution occurred prior to end of the period described in Code Sec. 72(t)(4) and was a nontaxable transfer of the portion of the account balance in the first IRA. The IRS concluded that the transfer from the first IRA to the new IRA constituted a modification of substantially equal periodic payments and that the transaction could not be corrected by transferring the assets back.

Visit our News Library to read more news stories.