I am in the second year of taking SEPP distributions from my IRA. Can I transfer some of the funds to a new IRA with different investment options?
The most recent guidance issued by the IRS and the Treasury Department is Revenue Ruling 2002-62. There is some disagreement in the field about the definition of account as it relates to "changes to account balance" in this ruling and both sides make convincing arguments.
One side of the argument is that you can transfer a part of your account balance to another account, provided the amount transferred is not added to an IRA that already has assets. According to this argument, this type of transfer is acceptable, provided the following requirements are met:
An individual need not limit his or her SEPP calculation to one IRA. In fact, many individuals include the balances of more than one IRA in an SEPP calculation. Although the individual may be able to identify the assets by different account numbers, many feel that this is defined as one account, particularly if they are all established under one IRA adoption agreement.
The other side of the argument holds to the traditional definition of an account, which states that if you have an account number from which you are receiving SEPPs, you can't transfer a portion of the balance of that account number to another retirement account with a different identifying number. This seems to meet the definition as provided in Revenue Ruling 2002-62, but the question then becomes whether the Treasury and the IRS place such limitations on an individual's ability to diversify his or her investments.
Both sides of the argument make sense. However, while Argument B seems to take on the literal meaning of Revenue Ruling 2002-62, splitting the IRA should not be considered a modification, provided the SEPP IRA assets are not commingled with other IRA assets. To be sure, you may want to consider getting a private letter ruling (PLR) from the IRS if the assets are of significant value. Or you may want to go along with any recommendation from your own tax professional.
You are, however, allowed to transfer the full IRA balance, provided the assets are transferred to an IRA that holds no other assets and you continue the SEPP from the new IRA.
For further reading, see Moving Plan Assets: How To Avoid Mistakes, Moving Your Plan Assets? and Rules Regarding Substantially Equal Periodic Payments (SEPP).
This question was answered by Denise Appleby