Not-client is 57 or so, and started taking substantially equal periodic payments in 2004. On April 16th or 17th, he walked into his broker's office and said "Turbotax says I can make a deductible IRA contribution!" The only way to get the money in timely was to put it into his existing account, which was the SEPP account. A week later, someone remembered he had the SEPP, and said "Oh, no." Broker says the only way to get the money back out without it being treated as a contribution followed by a premature distribution is as "return of excess contributions" (which is what they suggested as a possible course of action). Per Rev Rul 2002-62, "any addition to the account balance" will be considered a modification of the 72(t) payment series, and triggers recapture tax (10% of the distribution stream, plus interest). Because each individual account can be separate for the purposes of determining substantially equal periodic payments, it's very likely that a contribution to a new / different IRA would have been permissible. However, once the money was 'tainted' by running through the IRA with the 72(t) payment series, I believe that a rollover / splitoff to a second IRA would only be allowed pursuant to a favorable Private Letter Ruling - and there's a decent chance the ruling wouldn't be favorable. (The PLRs I saw seemed to be sympathetic towards broker error and account balance changes due to court order, but not to people whose choices had undesirable consequences.) It's also too late to undo the "wrong" contribution and make a new contribution to a new account. I can't find anything on point regarding whether a distribution coded as "return of excess contributions" would be successful at undoing the original contribution for 72(t) purposes. This really wasn't an excess contribution; it just has undesirable consequences. It would also require amending his tax return, and the explanation "I didn't mean to blow my 72(t) payments, so I undid my deductible IRA contribution after the filing deadline" IMHO isn't a very good one in terms of avoiding further investigation. Anyone have any thoughts on this?
Phoebe :)