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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Re: IRA Distribution Penalty Exception Date: 6/23/2000 6:19 PM
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TheBadger wrote,

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

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