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This is a shameless request for tax advice. I'd like some feedback on whether I'm doing this correctly. I plan to start taking distributions from my traditional IRA under the so-called "annuity" exception. I have the value of my IRA as of 12/31/99, and I plan to use the joint life expectancy from the tables in IRS Pub 590. The divisor I get based on our ages as of 12/31/00 is 38.7 (I'll be 51, she'll be 50). My reading of the instructions is that I simply divide the value of my IRA (no adjustments) by 38.7 to get the required distribution for the first year. For subsequent years, I simply refigure the joint life expectancy divisor from the same tables using our ages as of our birthdays for those years. Is it that simple? Am I missing something? Thanks for any help.
-Chester :)
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This is a shameless request for tax advice. I'd like some feedback on whether I'm doing this correctly. I plan to start taking distributions from my traditional IRA under the so-called "annuity" exception. I have the value of my IRA as of 12/31/99, and I plan to use the joint life expectancy from the tables in IRS Pub 590. The divisor I get based on our ages as of 12/31/00 is 38.7 (I'll be 51, she'll be 50). My reading of the instructions is that I simply divide the value of my IRA (no adjustments) by 38.7 to get the required distribution for the first year. For subsequent years, I simply refigure the joint life expectancy divisor from the same tables using our ages as of our birthdays for those years. Is it that simple? Am I missing something? Thanks for any help.

Yes it's that simple. But the method you describe is the life expectancy or "minimum" method, not the annuity method.

Also when you take the distribution next year you'll use your 12/31/2000 IRA balance to make the calculation.

intercst
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"Yes it's that simple. But the method you describe is the life expectancy or "minimum" method, not the annuity method.

Also when you take the distribution next year you'll use your 12/31/2000 IRA balance to make the calculation."

intercst

You're right, it's the life expectancy method. I'm looking for the lowest required distribution. And thanks for the reminder about using the correct year's balance. I appreciate your feedback.
-Chester :)
No. of Recommendations: 1
You have got it correct other than it is the "minimum" or "life expectancy" method; not the "annuity" method.

However, Given your ages (early 50's) IMHO, there are less risky approaches to the same issue by adopting either the amortization or annuity methods on only a portion of your IRA's that will generate the same annual cash flow while not pledging all of one's IRA's into the initial calculation.

If you have thought through all of these already then fine; if not, IMHO you should seek some professional counsel before initiating any withdrawal transactions. 90% of making "substantially equal periodic payments" SEPP's work effectively is in the initial design to fit your financial needs.

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"...there are less risky approaches to the same issue by adopting either the amortization or annuity methods on only a portion of your IRA's that will generate the same annual cash flow while not pledging all of one's IRA's into the initial calculation."

I assume the risk you are referring to is having to take a larger than desired distribution due to an increase in the IRA balance. Correct?
-Chester :)
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However, Given your ages (early 50's) IMHO, there are less risky approaches to the same issue by adopting either the amortization or annuity methods on only a portion of your IRA's that will generate the same annual cash flow while not pledging all of one's IRA's into the initial calculation.

The only way to make the amortization or annuity methods "less risky" is to get an IRS private letter ruling allowing annual recalculation, or to go ahead and do the recalculation without the benefit of your own PLR and accept the small chance that the IRS will object and assess the 10% penalty.

Using the amortization or annuity methods without recalculation runs two risks:

(1) A severe stock market collapse could deplete your IRA before age 59.5. If that happens, the IRS will assess the 10% penalty plus retroactive interest charges on all distributions to date. (That will be a big number.)

(2) The happier risk is that your portfolio will explode in value due to the ongoing bull market. Since both the amortization and annuity methods result in fixed withdrawal amounts, a first year withdrawal of 8% of the IRA value would drop to less than 1% of the IRA value if your IRA grew ten-fold. (That happened to my IRA. I still thank my lucky stars that I rejected the advice of the two CPAs I consulted (to use the annuity method on part of my IRA) and just did the life expectancy method on the whole IRA balance. My Year 2000 IRA withdrawal is now twice my annual living expenses as a result. If I followed the CPA's advice, I'd have a large chuck of my IRA tied up for 20 years (I started SEPP at age 40) while my fixed withdrawal under the annuity method shrank to less than 1% of the IRA balance.)

No matter what method you choose, you'll be free to make withdrawals of any amount once you turn age 59 1/2. It's not like you are making a lifetime pledge of your IRA assets to a fixed distribution scheme.

intercst

No. of Recommendations: 3
Portions of what "intercst" says are true but not entirely accurate. However, putting that aside, "intercst" misses the biggest risk of all because we entertain or understand the word differently.

Life, in general, is volatile both on the up side and sometimes unfortunately on the down side. Further, one's life for the next 10 years is likely to be financially volatile implying that one's financial needs can easily go up and down over a 10 year year period.

SEPP's using §72(t)(2)(A)(iv) require allocating an asset base (IRA's, 401(k)'s & other deferred accounts) to the program & then applying one of three methods to the asset base to arrive at a fixed annual withdrawal. Then depending on the method selected & tax[ayer elections, the annual withdrawal amount may or may not change in each subsequent year.

However, the key issue here is the allocation of an asset base. Once the assets are allocated or pledged to the process, they are tied up and can not be used for other purposes; thus the biggest risk of all is that one may pledge his or her assets to a SEPP program abd then subsequently want or need those same assets for another purpose and arrive in a financially more riunious situation.

As an example, you have \$1,000,000 in an IRA, you are age 50 & need or want \$30,000 per year. As a result, you select the minimum or life expectancy method. Table I, pub 590 tells us that the divisor for a 50 year old is 33.1 & \$1,000,000 divided by 33.1 is convienently \$30,211. Further, you continue this process to age 55 with gradually increasing withdrawals in the \$34,000 range. At age 56, a major financial emergency strikes requiring \$100,000 and your only source of funding is the IRA. You withdraw an additional \$100,000 for your IRA to satisfy the emergency. The cost of doing so is to disqualify all prior withdrawals and the \$100k such that approximately \$35,000 in penalties are due.

Plan #2 --- split the \$1,000,000 into two IRA's; A with \$450,000 and B with \$550,000. Adopt the amortization method on IRA A using 6% and a 33.1 year life expectancy. This then yields \$31,600 per year from IRA A --- a pretty convienent starting number while leaving IRA B untouched. The same financial emergency arises in year 6 and you make the \$100,000 withdrawal from IRA B; not IRA A. Additional taxes and penalties due are \$10,000; \$25,000 less than plan A above.

In terms of attempting to match assets to programs & dealing with the volatilitiy of life (volatility = risk) plan #2 above is far superior than plan #1 by keeping some dry powder on the side while potentially being a little more aggressive (not necessarily more risky) in method adoption on the smaller IRA A.

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The only way to make the amortization or annuity methods "less risky" is to get an IRS private letter ruling allowing annual recalculation, or to go ahead and do the recalculation without the benefit of your own PLR and accept the small chance that the IRS will object and assess the 10% penalty.

Intercst, the above is no longer true. The IRS has issued internal memorandum (which is discoverable and establishes precedent) which describe in reasonable detail how & when the IRS considers use of the amortization or annuity methods in conjunction with annual recalculation to be acceptable. See my post #10834 on the REHP.

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Badger gave good advice on splitting the IRA into 2 IRAs. Use one to make the payments and one for future "just in case" emergency penalty withdrawals.

Then if the emergency happens, the SEPP payments from IRA #1 won't be subject to back dated penalties.

For IRA #1, if you use the annuity method; use within 80% - 120% of the US Treasury rate as the implied interest rate. PLRs indicate imply that the IRS feels this is the "reasonable rate" stated in Pub 590.

*Cat
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TheBadger said "thus the biggest risk of all is that one may pledge his or her assets to a SEPP program abd then subsequently want or need those same assets for another purpose and arrive in a financially more riunious situation."

Now I'm glad I posted here before executing my plan. Thanks, Badger, for pointing out a risk I hadn't thought about at all. This has given me a lot of food for thought.
-Chester :)