Changing Substantially Equal Pmts

[Guest rickw]

I have a 55 year old client who had been taking, say, $100,000 annually for a few years. With new 72(t) changes, he could elect to reduce that to a new RMD of, say $30,000 for 2002. However, he had already taken $50,000 in 2002 before we caught up with him.

. a)Is he now forced to continue with the $50,000 figure going forward, or can he still go with the lesser $30,000?

. b) Does continuing the $50,000 pose a problem, since it is not really the precise amount that any of the methods would have calculated. (i.e., too low for the old method and too high for the new tables!) Or can he establish any amount he want as long as it exceeds the RMD and he maintains it?

Thanks!

[BPickerCPA]

At this point the only thing he can do is withdraw the balance of the $100,000. If he stops at $50,000, he's blown the 72t and will be subject to penalties.

He can switch to the MRD method for 2003. Note that for the MRD method, you must take the exact amount of the MRD. You don't have the option of taking more, like you do when you're over 70½.

[Guest rickw]

If he fails to take advantage of the one-time chance to switch methods in 2002, is that option lost; or can he make the switch in 2003 or anytime thereafter?

Thanks.

[BPickerCPA]

He can make it in 2003 or any time thereafter. Once the switch is made, you can't go back.

[Appleby]

The option to switch is optional for 2002, i.e. although the new reg. become effective for 2003, your client may use it for 2002

Therefore, for this year, if you refigure the amount and determine it to be $30,000 under the life expectancy method, and $50,000 have already been distributed, then the amount for 2002 have already been met. This will not be considered a modification

For the remaining years, you would need to calculate the amount using the life expectancy method. This amount will fluctuate , since it will be based on a market value that will change each year and is required to be redetermined each year

[BPickerCPA]

Appleby,

If you compute the RMD to be $30,000 and you already took $50,000, then you did NOT take the RMD for the year since you took too much, and you therefore cannot use the RMD method for 2002. The RMD method, despite it's name of "minimum distribution" is NOT a minimum, it is an EXACT amount, and it cannot be exceeded without it being considered a modification.

Anyone who took more than the computed RMD amount for 2002 needs to take the correct amount under their OLD method, and then switch in 2003.

[Appleby]

Barry,

I can see your logic- however, as we know, logic does not always rule decisions made by those who write our regulations.

In all fairness, this is not addressed in Revenue Ruling 2002-62. However, we received confirmation from two* sources that in the transition year (i.e. the year the IRA holder decides to switch to the life expectancy method) one of the exceptions that is made is for an individual using the amortization or annuitization method, having redetermined the amount by using the life expectancy method, will be deemed to have satisfied the payment for that year, providing the amount withdrawn is at least the new amount determined using the life expectancy method. It will not be considered a modification , if the amount calculated under the life expectancy method is exceeded as a result of the IRA holder taking the amount using the amortization or annuitization method prior to switching to the life expectancy method.

When you consider the basis for issuing this Rev. Rul. this makes sense. Remember this ruling was issued to help IRA holders prevent their retirement balances, which has become much lower than projected due to poor market performances, from being prematurely depleted

* The two sources are:

1. We contacted the Retirement Benefits Department of IRS myself and was given this information

2. We participated in a seminar, hosted by one of the leading retirement plan-consulting firms in the business, and they stated that spoke with the Author of Revenue Ruling 2002-62, who provide them with verbal confirmation of same. I know verbal confirmation cannot be used as the basis for any determination nor does it constitute guidance, however at this time… this is all we have.

[BPickerCPA]

Appleby,

This has nothing to do with logic, as you state, and everything to do with conversations with people in Washington at the IRS.

I personally spoke to the author of the Rev Rul and was told that you could either take the previous computed amount, or the exact RMD amount. This was in October.

I tried again in the middle of December and received a phone call on Christmas Eve from one of the top people in this department at the IRS, who specifically stated that if your RMD amount was $40,000 and your original computation was $100,000, and you had already taken $70,000, you then had to take the balance of $30,000 to avoid the 10% penalty.

I WANTED your answer; I didn't get it and I have to go with what my own ears heard.

Regards.

[Appleby]

I hear ya…

I guess we will have to agree to disagree on this one- especially since verbal confirmation cannot be used as guidance. This is a perfect example of why.

This would not be the first time the Service has provided conflicting information, when provided verbally.

Anyway, we continue to tell customers to check with their tax professionals before making any decisions. The problem is, some tax professionals are sending the clients to the IRA custodians…