IRA owner’s partial transfer of IRA balance to another IRA was modification to series of substantially equal payments

The IRS has privately ruled that an individual retirement account (IRA) owner’s transfer of a portion of his IRA balance to another IRA was a modification to a series of substantially equal periodic payments, as described in Code Sec. 72(t)(4). The modification to the series of substantially equal periodic payments could not be corrected by transferring the portion back to the first IRA.

After an IRA owner had received distributions for several years that were intended to be a series of substantially equal periodic payments, his financial advisor stopped doing business with the company holding the owner’s IRA and began doing business with a new company. Because the IRA owner wanted to keep his IRA invested with this financial advisor, the owner attempted to transfer all of the IRA, but only succeeded in transferring the majority of the IRA, to another IRA with the new company. The IRA owner did not learn until after the date of transfer that the new company would not accept the part of the old IRA that was invested in certain real estate investment trust funds.

After the transfer, the new company began to make monthly distributions from the second IRA. However, the new company erroneously changed monthly distribution amounts from the gross monthly distribution amounts that the owner had been receiving under the first IRA to smaller amounts. Thus, the total yearly IRA distribution was less than the yearly amounts previously taken out under the original distribution plan. Later, corrective distributions were made from the second IRA to match the prior yearly distributions. During this time, no distributions were made from the first IRA.

The IRS found that the transfer of the portion of the first IRA to the second IRA occurred prior to the IRA owner attaining age 59½ and was a nontaxable transfer of a portion of the account balance in the first IRA under section 2.02(e) of IRS Rev. Rul. 2002-62. Based on the facts and representations and pursuant to section 2.02(e) of Rev. Rul. 2002-62, the IRS determined that the transfer constituted a modification to the series of substantially equal periodic payments that the owner had begun to receive several years before. The IRS further concluded that the modification to the series of substantially equal periodic payments could not be corrected by transferring the portion back to the first IRA.

The subsequent missed distributions and corrective distributions were subject to the Code Sec. 72(t) 10% early distribution tax since the modification to the series of substantially equal periodic payments had occurred upon the transfer. Finally, the IRS ruled that the fact that any portion of the first IRA was transferred to another IRA resulted in a modification to a series of substantially equal periodic payments and the imposition of the 10% early distribution tax, beginning with the first payment.

Source: IRS Letter Ruling 201323045.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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