avoidance of 59 1/2 penalty

[wsp]

A question was posed to me and I wasn't sure of the answer...

A participant has an IRA of 350k. He is age 57. He would like to start taking distributions from his IRA to build and pay a mortgage on a second home but doesn't want to incur the penalty. Can he take out more than the amounts calculated using the minimum distribution amounts, so long as it won't deplete the balance sooner than 5 years?

This person wants to take 20k a year....

allowable?

If so, would it be prudent to recommend that the person take 100k of the money and move it into another IRA, since you don't have to aggregate them, purely as a just-in-case you need to access additional funds and prevent yourself from changing your installment payments?

[saabraa]

I suspect you can't quite get there. A couple of years ago, IRS simplified the rules for setting up a series of substantially equal periodic payments. Can't remember the cite and don't have a lock on the methodology. I suspect a 57 year old will have too long a life expectancy to make the money last at 20K a year. It must last for life or life expectancy. A five year payout plan is not allowed.

Moving some of the money to another IRA won't work to avoid the 10% tax completely, although it seems a good strategy overall to use the 2 IRA plan. I think you'll be left short of $20K as a permissible distribution. I think he needs to bite the bullet and incur the additional 10% tax for the first 2 or 3 years on some unknown ideal amount of distribution from IRA #2. When he reaches 59 1/2, he can take funds from the 2nd IRA but must continue with the first IRA's payment methodology until 5 years are up. Can't accelerate payments from the first IRA.

[saabraa]

Did partial research and concluded you're closer than I originally thought. There are still 3 permissible methods, and the annuitization or amortization method will give you the highest result. The section 1274(d) midterm rate times 1.2 is around 5%. One option for life expectancy for a 57 year old is 39.7. That's the uniform life figure from rev rul 2002-62 and may be a joint life expectancy, so maybe there's a lower number for a single life. You might want to look at Notice 2004-15 and eventually the 1.401(a)(9) regs.

[Appleby]

Use the reverse calculator at http://www.72t.net/Sepp/Irc72tReverseCalculator.aspx. This allows you to determine the account balance required to produce a pre-determined amount for each calculation method . The amount can be transferred to a separate IRA and the 72(t) distributions taken from that IRA

[saabraa]

The calculator is a great tool. Thanks Appleby. That sure beats reading the regs, etc. Come to find out that one IRA will suffice to achieve at least a $20K annual payout.

[wsp]

The calculator is a great tool. Thanks Appleby. That sure beats reading the regs, etc. Come to find out that one IRA will suffice to achieve at least a $20K annual payout.

Thanks to the both of you. I stumbled across the calculator last night while surfing for info while I was at home. Why I was doing that, I'm still not sure. The reason that I was thinking to have the two accounts was to make sure that the paperwork is clean..and if he needed additional funds he could withdraw them from the second account without fouling up his substantial equal payments. I think I read about a plr that ruled against additional funds being pulled from the account that the SEPP were being taken from.

[jevd]

If you go to the main page of the calculator site you will be able to access the discussion board there dedicated primarily to SEPP questions. GFW is a great source of information.