Section 72(t) - Substantial Equal Periodic Payments

[Guest John E McGrady III]

Under the substantially equal periodic payment exception to the 10% excise tax on early distributions, are there limits on when the money can actually be distributed? For example, if the amortization method is used and the participant calculates an end of period payment using a reasonable interest rate and life expectancy, must the participant take out only a single distribution at the end of the year. I know its possible to compute quarterly or montly distributions. I'm really just interested in knowing if its acceptable for the annual distribution to be distributed in unequal payments during the year as needed. Thanks in advance for your comments.

[BPickerCPA]

You compute how much is to be removed during the year, and you cannot deviate off that schedule. How you take it during the year is of no consequence.

[Bruce Steiner]

I just wrote an article on this, which has been accepted for publication in Estate Planning. It is scheduled to appear in the December 1999 issue.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Guest Kyle Stratton]

An individual has multiple (3) IRAs and wants to begin substantially equal payments now (age 53).

QUESTION: Is the payment distribution calculated from the aggregate value of all IRAs combined?...or...Can the distribution be calculated based only upon the valuation of only one (1) IRA?

QUESTION: If a substantially equal payment option is elected at this time it must remain until the individual reaches age 59 1/2. At that time can the distribution be reduced or stopped totally?...or...Must the distribution remain constant of increased?

Please advise!

Kyle Stratton

[Guest ezollars]

There are a number of private letter rulings that make it clear that you can use a single IRA account for computing the substantially equal payments options, ignoring other IRA accounts. I believe Bruce posted a list of such PLRs on the usenet group misc.taxes.moderated earlier this week--a DejaNews search should turn them up.

Once you have completed the minimum term (which is the longer of five years or until reaching 59 1/2), then you can do anything you want with the distribution. However, be very careful that you are out of the woods, especially on the five year test. Merely taking the final distribution does not end the running of the five year period--you can't take additional distributions after that one until the full five years runs.

In essence, this is an area where the courts cut no slack should you violate the rules, even in the most obscure manner. If you do this, be sure you do it right.

[Bruce Steiner]

See PLRs 9812038, 9801050, 9747045, 9050030, which approved this.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[John Olsen]

Bruce,

I would SURE like to get a copy of that article. Alas, I don't take Estate Planning, and neither does Washington University Law School.

I'd be happy to pay for a reprint.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO