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Dear Pixy or Kat
On my path to enlightenment and financial bliss, I have come to a crossroads. I would like to make
my life easier by retiring in stages. I am under 59 1/2 and have been trying to understand the
exceptions to the 10% additional tax and the annuity distribution method. In figuring out my
minimum distribution from my IRA, as part of the life expectancy method, I have looked up the division factors for both single and joint survival. To make some decision regarding which factor and when, I hope
get an answer to this query:

If the life expectancy method is IRS approved for a series of substantially equal periodic payments,
do these payments need to be annual or could they be every 8 months or some other less than one
year periodic payment? For example, if the approved amount for a minimum distribution is 10K$, I believe I could take out 3K$ + 4K4 +5K$ at different times during the year so that the sum equals approved 10K$. However can I take out 10K$ in March, July, and November for year 1; 10k$ in May for years 2,3 and 4; and 10K$ February and August for year 5? They are equal periodic payments, but the times are less then or equal to a year.
Thank you in advance for your help in this important retirement issue.
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DrMerlot,

<< If the life expectancy method is IRS approved for a series of substantially equal periodic payments, do these payments need to be annual or could they be every 8 months or some other less than one year periodic payment? For example, if the approved amount for a minimum distribution is 10K$, I believe I could take out 3K$ + 4K4 +5K$ at different times during the year so that the sum equals approved 10K$. However can I take out 10K$ in March, July, and November for year 1; 10k$ in May for years 2,3 and 4; and 10K$ February and August for year 5? They are equal periodic payments, but the times are less then or equal to a year.>>

The payments must equal the total withdrawal you must take annually. It makes no difference of how or when you take those payments as long as the total for the year is that called for in the withdrawal method you selected under Section 72(t).

Regards….Pixy
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Dear Pixy: Thanks for the info. What I don't understand is the statement in Chapter 5 page 22 of IRS IRA bulletin which is "You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply." This could mean some integer multiple of the exact amount required by the life expectancy method within a give year. What do you make of it?
Also where can I get a copy of Section 72(t)?
Dr. Merlot
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DrMerlot,

<<What I don't understand is the statement in Chapter 5 page 22 of IRS IRA bulletin which is "You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply." This could mean some integer multiple of the exact amount required by the life expectancy method within a give year. What do you make of it?
Also where can I get a copy of Section 72(t)?>>

Any good library will have a copy of the Infernal (sic) Revenue Code from which you may copy that section.

The statement means that you may take 365 distributions or just one during the year, the total of which equal the distribution required by the method you selected for the exception.

Section 72(t)(2)(iv) stipulates that funds may be withdrawn from an IRA or qualified retirement plan at any age prior to 59 1/2 without incurring the 10% excise tax (penalty) on those withdrawals provided they are part of a series of substantially equal periodic payments made over the participant's life expectancy or the joint life expectancy of the participant and a designated beneficiary. There are three approved and acceptable methods for receiving these payments, all of which result in a different sum paid to the recipient.

Minimum distribution method. In this method, the number of years of life expectancy for the participant or the joint life expectancies of the participant and a benefirciary is determined using the IRS life expectancy tables found in IRS Pub 590. The account balance as of the beginning of the year is divided by the number found in the applicable table, and the result becomes the amount that must be withdrawn in the first year. In the second and succeeding years, the required withdrawal amount is recalculated based on the new beginning balance in that year in one of two ways: reduce the life expectancy used in the first year by one and use that as the new divisor; or, find the new life expectancy based on age in year two and use that. For every successive year, you must continue using the recalculation method used in year two of the withdrawal. This method results in the smallest withdrawal amount of the three methods permitted by the IRS to avoid the excise tax.

Amortization method. In this method, life expectancy is determined using the tables in IRS Pub 590. Additionally, an assumed earnings rate may be used to determine the annual withdrawal required to expend the entire account over that life expectancy. This must be a "reasonable interest rate" decided on at the beginning of the withdrawals, and generally must be one which falls within 80% to 120% of the federal mid-term rate. There is no precise definition of this rate that has been established by the IRS, so it must be selected with care. Once determined, the withdrawal remains fixed from year to year; however, the amount will be larger than that determined using the minimum distribution method.

Annuity method. This method results in a fixed withdrawal amount like the amortization method, and it is computed similarly. The difference lies soley in the fact that IRS life expectancy tables are not used. Instead, those in general use by the life insurance industry are acceptable. An annuity factor derived by using the UP-1984 Mortality Table is the standard for this method. The resulting calculation results in the highest withdrawal amount of the three methods.

I see a number of drawbacks to using the 72t method of withdrawals. First, regardless of method used, the process must continue for a minimum of five years or until age 59 1/2, whichever occurs later in time. Start at age 58, and you must continue until age 63. Start at age 50, and you must continue until age 59 1/2.

Second, make a simple math error in computing the EXACT amount of the withdrawal, stop the withdrawals too early, or change the calculation method, or take too much/little in the year and all withdrawals up to that point are subject to the 10% excise tax AND a penalty for failure to pay that amount in prior tax years.

Third, the minimum distribution method too often fails to provide the needed income to the recipient. To increase the amount, the person must use one of the other two methods. The "reasonable interest rate" that must be used in these methods, while resulting in a higher withdrawal amount, can be too easily challenged by the IRS. Thus, it is not a rate for someone to choose on their own. Additionally, the calculations involved are beyond the capability of most folks. In short, there's too much potential for error and subsequent IRS penalties.

IMHO, those who wish to use Sec 72t should engage a professional skilled in the computations of all three methods. In addition, that pro should provide the account owner a letter specifying the method used in detail and expressing an opinion that the calculations comply with the requirements specified in the IRC and by the IRS. That way if something goes wrong, there's someone besides yourself to hold accountable. Things are just much safer that way.

Regards…..Pixy
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Dear Pixy: Thanks for the directional information. Not only do I feel pixilated, overwhelmed with colorful insights into the foolish world of money management and the IRS, but this sprinkling of "Pixy" dust has induced a psychodelic experience within my cognitive assets which should make my retirement years more amusingly tempestuous than I had considered possible, sic itur ad astra.
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DrMerlot,

<<Not only do I feel pixilated, overwhelmed with colorful insights into the foolish world of money management and the IRS, but this sprinkling of "Pixy" dust has induced a psychodelic experience within my cognitive assets which should make my retirement years more amusingly tempestuous than I had considered possible, sic itur ad astra. >>

LOL... Amor doctrinae floreat, felix qui potuit rerum cognoscere causas. Et si hoc legere scis nimium eruditionis habes.

Regards….Pixy
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IRS Pub 590 is currently available online at:

http://www.irs.ustreas.gov/prod/forms_pubs/pubs.html
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Pixy,
I was very happy to find your comments on early IRA
withdrawls that can still avoid the excise tax. Do the
same exceptions apply to corporation funded "money purchase pension plans" and defined contribution profit sharing plans? I do not know the exact term for these plans(403, 457 etc) but I can find them if necessary.
Thanks
AnAprilFool
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Greetings, AnAprilFool, and welcome.

<<I was very happy to find your comments on early IRA
withdrawls that can still avoid the excise tax. Do the
same exceptions apply to corporation funded "money purchase pension plans" and defined contribution profit sharing plans? I do not know the exact term for these plans(403, 457 etc) but I can find them if necessary.>>

Yes, the rules also apply to qualified retirement plans. However, be aware that in such plans you can retire and leave your job at age 55, receive payments from those plans, and not have to pay the 10% early withdrawal penalty. Transfer the money to an IRA to continue the tax deferral, though, and you're back to age 59 ½. The secret sometimes is to take enough cash from the retirement plans to last to age 59 ½ and put the rest in the IRA. At other times it makes more sense to just pay the penalty. Each case must be evaluated on its own merits.

Regards…..Pixy
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