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ROLLOVER CENTER 
Substantially Equal Periodic Payments
IRC Sec. 72t
Withdrawals PenaltyFree
1. Are you under 59½ years of age and considering an early retirement?
2. Have you sheltered savings in an employersponsored retirement plan?
3.
Will you need monthly income from your IRA or Qualified Retirement Plan
(QRP) after retirement?
4.
Have you put your retirement on hold because of possible penalties
associated with early withdrawals from IRAs and QRPs?
If the answer to these questions is yes, then your
dilemma may be solved. Rule
72t (found in IRC Sec. 72t(2)(A)(iv), substantially equal periodic
payments, and modified under Revenue Ruling 200262), allows IRA owners
and QRP participants under 59½ years of age to withdraw predetermined
amounts from their IRA or QRP over a required period of time and avoid the
premature distribution penalty.
Ordinary income tax rules will apply.
Payments for QRP participants may not begin until separation from
service.
NOTE: The
10% premature distribution penalty is waived for QRPs when the participant
has separated from service after reaching age 55.
Background
Generally, distributions taken from an IRA or QRP
are taxed as ordinary income.
And, if the individual is under age 59½ (or 55 and separated from service
for a QRP), a 10% penalty is assessed to the amount withdrawn.
However, there are several exceptions to the penalty rule, such as
death, disability, firsttime homebuyer, higher education, and an
exception commonly known as Rule 72t.
The Program
IRA owners and QRP participants receive
predetermined income distributions based on their life expectancy, through
a scheduled series of periodic payments (not less frequently than
annually) that continue unaltered over a specified period of time.
Payment periodThe specified period for payments is either 5 years or until the participant reaches age 59½, whichever is longer. For example: If an IRA owner turns age 50 and begins taking substantially equal periodic payments, that individual must continue payments until reaching age 59½ (9plus years). If an IRA owner is 58 when payments begin, that individual must continue payments for 5 full years (until age 63) Note: The 5year rule is waived at death or disability and the program ends.
Structuring
of payments
There are three methods suggested by the Internal
Revenue Service (IRS Notice 8925) to determine payments that will qualify
as ”substantially equal periodic payments based on life expectancy,” which
are:
Method 1: Required minimum distributions (RMDs)
Using this method, payments
are determined by dividing the individual's IRA or QRP balance by their
single life expectancy factor, or a joint factor of the individual and the
primary beneficiary. The
factor to be used is selected from the single life expectancy table, the
joint life expectancy table, or the uniform lifetime table.
Once a table is selected, that same table must be used to determine
each subsequent year’s distribution.
The account balance that is used to determine payments must be
determined in a reasonable manner based on the facts and circumstances.
Example:
An individual intends to begin taking distributions on July 1, and
has an IRA that is valued daily.
It would be reasonable to determine that the first distribution may
be based on the value of the IRA on any day from December 31 of the
previous year to July 1. In
this example, the individual decides to use his December 31 balance of
$100,000. He is single and
will turn age 50 in the year of the first distribution.
Using the Single Life Expectancy Table, found in the 2002 IRS
Supplement to Publication 590, he determines that his single life
expectancy is 34.2 years. His
payment is calculated by dividing $100,000 by 34.2, resulting in an annual
payment of $2,923.98. For
subsequent years, the individual will “recalculate” each year’s payment by
using the IRA value on December 31 of the prior year, or a date within a
reasonable period before that year’s distribution, divided by the newly
determined life expectancy factor again found in the Single Life
Expectancy Table.
Method 2: Fixed
amortization
The payments under method 2
are determined by amortizing the IRA or QRP balance over the single life
expectancy of the individual, the joint life expectancy of the individual
and the designated beneficiary, or the life expectancy found in the
uniform lifetime table. Any
interest rate that is not more than 120% of the federal midterm
applicable federal rate, determined on the date payments begin, may be
used.
Example: An individual is 50 years old
and has a balance of $100,000 in his IRA on the day he intends to take his
first distribution. He
determines that 120% of the midterm applicable interest rate is 2.71%.
Factoring in the 2.71% rate of return and a single life expectancy
of 34.2 years, the calculated annual payment will be $4,522 per year over
the scheduled period of distributions (subsequent year’s payments are not
recalculated).
Method 3: Fixed
annuitization
A third alternative is to
divide the IRA or QRP balance by an annuity factor.
The factor is determined based on the present value of an annuity
of $1 per year beginning at the individual's age attained in the first
distribution year and continuing for the life of the individual. This
factor is determined by using an interest rate of 120% of the midterm
applicable federal rate on the date payments begin.
Example: Using 2.71% as the interest
rate of return and the single life mortality table, a 50yearold IRA
owner with a $100,000 balance would receive annual distributions of $4,507
per year, over the scheduled period of distributions (subsequent year’s
payments are not recalculated).
To calculate payments using
Method 3, a tax advisor or an actuary must provide the appropriate annuity
factor table. Changes to account balance Under all three methods, 72t payments are calculated with respect to
the account balance established prior to the first 72t payment.
This means that a modification to the 72t program will occur if,
after the starting date, there is:
·Any
additions to the current account balance other than gains or losses;
·Any
nontaxable transfer of a portion of the account balance to another
retirement plan; or
·A
rollover by the taxpayer of a 72t payment received resulting in such
amount not being taxable. Existing
72t program relief
Once a 72t payment schedule was established and
payments began, the series of payments could not be modified in any way.
If they were modified (other than by reason of death or disability), the
10% early distribution penalty tax, plus interest, would be applied
retroactively, beginning with the first distribution.
However, Ruling 200262 was introduced to provide relief: 1. If, as a result of following an acceptable method of determining substantially equal periodic payments, the assets in an individual account plan or IRA are exhausted, and the payments cease, no additional income tax or penalties will be due. 2. Taxpayers who have an existing 72t program and are using the “fixed amortization” or the “fixed annuitization” method to compute their payments may switch to the “required minimum distribution” (RMD) method. The change in method will not be considered a “modification,” thus no penalties or interest will apply. This switch is a onetime only option and is irrevocable.
Questions and Concerns
Q.
What interest rate may be used for the “fixed amortization” or
“fixed annuitization”
methods of calculations?
A.
The interest rate that may be used is any interest rate that is not more
than 120% of the federal midterm rate (determined for either of the two
months immediately preceding the month in which the distributions begin).
The “Index of Applicable Federal Rates” may be found at:
http://www.irs.gov/app/picklist/list/federalRates.html
Q.
How do I determine my balance for my first distribution?
A.
The balance to be used must be determined in a reasonable manner based on
the facts and circumstances.
It would be reasonable to
determine the yearly account balance based on the value of the IRA on any
day from December 31 of the prior year to the date that the first
distribution will occur. Q. Does an individual who has more than one IRA or QRP have to include all IRA and QRP balances in the program?
A.
It is not necessary to take distributions from other IRAs or QRPs
or to consider their balances when determining substantially equal
periodic payments (Private Letter Ruling (PLR) 8946045).
*
Q.
I have selected the “required
minimum distribution” method for my 72t program and have determined my
first distribution. What
balance will I use for subsequent payments?
A.
It would be reasonable to use the value
either on December 31 of the prior year or on a date within a reasonable
period before that year’s distribution.
Q.
When using one of the three
methods suggested by the IRS to determine payments, which life expectancy
table must I use to determine my distribution?
A.
An individual may choose from one of three tables to determine their
distribution:
1.
The uniform lifetime table –
This table projects the life
expectancy period using the age of the participant and assumes a
beneficiary that is 10 years younger.
2.
The single life expectancy table –
This table projects the life
expectancy period based on the participant’s age only.
3.
The joint and last survivor table –
This table projects the life
expectancy period based on the actual ages of the participant and the
oldest person named as a beneficiary. Q. Must payments be structured over a calendar year, or may an alternate 12month period be used?
A.
In PLR 9021058, an individual was allowed to use the 12month
period from December 15 to December 14.
It appears an annual measuring period other than a calendar year
may be used.
* Q. May payments in the first year be based on the number of months remaining in that year?
A.
Yes, the first year’s payments may be based on the number of months
remaining. In PLR 9049044, the
IRS allowed an IRA owner to pro rate the first payment rather than take a
payment based on a full year.
* Q. Once substantially equal periodic payments begin, can additional distributions (in excess of the structured payments) be taken from the same account, provided the 10% early distribution penalty is paid?
A.
No, any additional distributions exceeding the structured payment
amount would be viewed as a modification of the payment schedule.
The 10% early distribution penalty would be assessed retroactively.
*Private Letter Rulings may
only be relied upon by the person who requested that ruling,
and oral interpretations from
the IRS cannot be relied on as authoritative guidance.
Penaltyfree means playing by
the rules
If you retire early and want to take withdrawals
from an IRA or QRP prior to age 59½, one way you can avoid paying the 10%
premature distribution penalty tax is by taking substantially equal
periodic payments. However, qualifying for this exception is complicated,
and it's important that you understand and follow all the rules.
Stifel Nicolaus Can Help
Your Stifel Nicolaus Financial Advisor and the
Stifel Nicolaus Retirement Plan Services Department are well educated in
the substantially equal periodic payment program and can offer expertise
to you. In addition, Stifel Nicolaus can help you determine if the 72t
program will help you pursue your retirement income needs and goals.
Contact your Stifel Nicolaus Financial Advisor for
additional information today.
This information is from sources
believed to be reliable, but its accuracy is not guaranteed.
All material and hypothetical examples are for educational purposes
only, and it is always recommended that you seek the aid of a competent
tax advisor or tax attorney who may assist you with proper tax advice and
guidance. To better understand your options when taking a distribution under rule 72t please take a minute to order a Rollover Kit. 
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