Age 55 IRA owner wants withdrawals without 10% penalty -- how to do?

[jkharvey]

A participant dies and his beneficiary (55 years ol) takes a direct rollover of the account balance into her own IRA. She wants to be able to take distributions from the IRA each year (about $3600 or so for living expenses) without incurring the 72(t) excise tax. Any suggestions on how this can be done? The payout over life expectancy option provided for in 72(t) is not going to work because the distribution amount is not going to be high enough.

Is there something about a 5 year payout that approximates or exceeds a life only annuity payment that would avoid the 10% excise tax?

[Mary Kay Foss]

I hope the beneficiary was the spouse because only a spouse or the participant can roll over a qualified plan distribution. If the beneficiary is not a spouse, the entire amount is taxable (but not subject to the 10% penalty).

A beneficiary is not subject to the 72t penalty with an inherited benefit, so age is not a factor. Payments can come out in any fashion and avoid the 10% penalty.

The problem is that once a spouse rolls over the distribution it is no longer considered inherited and the 72t penalty is imposed.

I hope the actions you describe are just being contemplated rather than already accomplished.

[Guest Rudy]

If the IRA holder does the following, then no excise tax is required:

1. Set up a schedule of substantially equal payments.

2. Payment must be made at least annually.

3. Payments must last for the LONGER of five years or until the accountholder reaches age 59 1/2.

4. Payment schedule must be based on single/joint life or be for a guaranteed period of time.

5. The amount taken must be determined by the 70 1/2 method, the annuity method or the amorization method.

Hope this helps.

[jlf]

One can avoid the 10% penalty by taking substantially equal periodic payments that will last at least 5 years or until age 59.5 whichever is later. e.g. start at 55....no penalty tax if payments continue until age 60. Start at age 50....no penalty tax if payments continue until 59.5.

Best wishes,

Joel L. Frank