Pre-59 1/2 "Reasonable" Interest Rate

[Guest SPollock]

Is it acceptable to use a rate lower than the IRS acceptable rate of 120% of the Annual Long-Term Applicable Federal Rate when calculating a pre-59 1/2 Qualified Plan Distribution? Also, I was told by Universal Pension that the rate for September is 7.16% but Brentmark lists 7.53% for the rate for September. Who is right and what rate do we take 120% of? I appreciate any help!!

------------------

[This message has been edited by SPollock (edited 09-25-1999).]

[Bruce Steiner]

See my article on this subject, which is scheduled to appear in the December 1999 issue of Estate Planning.

There are numerous private rulings, which have approved various methods of computing the distributions.

The IRS is likely to be more concerned with interest rates that are too high than too low.

Your tax/estates attorney ought to be able to give you specific advice for your situation.

------------------

Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Mary Kay Foss]

The interest rate at the start of payments is one "not to exceed" a reasonable interest rate.

For the 120% AFR, I use the Section 7520 rate which is the last one listed in the Internal Revenue Bulletin when they publish the rates monthly.

Some rulings have allowed 120% of one of the other published AFR rates. You have to read the letter rulings to see which one.

[Guest L. Fitterer]

On behalf of Universal Pensions, Inc., (UPI), I'm responding to the above statement regarding what rate is recommended for use for purposes of calculating substantially equal periodic payments.

UPI provides the Applicable Federal Rates (AFR)provided monthly by the IRS via Revenue Ruling, with respect to substantially equal periodic payment calculation inquiries. Per the September, 1999, Revenue Ruling 99-37, the 120% AFR is 7.53%.

As Mary Kay and Bruce also suggest, PLRs have interpretted 'reasonable' rates of interest to mean an "assumed rate of interest equal to 120 percent of the long term applicable federal rate..." Again, the IRS approved this as a reasonable rate of interest in subsequent PLRs. When contacted via phone by UPI, a representative of the IRS further stated that the IRS will generally accept 80 percent to 120 percent of the federal mid- or long- term rate as "reasonable".