Interest rate not exceeding 120% of federal mid-term rate is deemed re

[Dave Baker]

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved).

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Interest rate not exceeding 120% of federal mid-term rate is deemed reasonable for calculating "substantially equal" payments under IRC §72(t)(2) exception (added July 18, 2000).

In PLR 200027062, the taxpayer, who is age 53, elected substantially equal payments to be made from his IRA. The payments are intended to be exempt from the premature distribution penalty, pursuant to IRC §72(t)(2)(A)(iv). The monthly payments were calculated on the basis of the taxpayer's IRA account balance as of November 30, 1999, uding A's life expectancy (30.4 years) under Table V in Treas. Reg. §1.72-9, and an interest rate assumption of 6%. This is the amortization method prescibed by Notice 89-25. In past rulings, IRS has said that the interest rate used to calculate substantially equal payments must be reasonabe, but has not established any safe harbor standard. In this ruling, the IRS takes the position that any interest rate which does not exceed 120% of the federal mid-term rate is treated as reasonable.