On October 3rd, 2002, the IRS finalized rule changes that affected 72(t)/(q)
distributions. This calculator incorporates the new rules, many of which are
described in detail below. For more information regarding these changes please
see Revenue Ruling
2002-62 on www.treasury.gov.
Reasonable interest rate
This is any rate less than or equal to 120% of
the Federal Mid-Term rate for either of the two months immediately preceding
the month in which the distribution begins.
Click here to see the most current rate information on IRS.gov. For May
2005, 120% of the Federal Mid-Term rate is 5.15%.
It is important to note that the associated law that created 72(t)
distributions did not define what was to be considered a reasonable interest
rate. As such, the guidance from the IRS generally flows from the concept that
they will not allow people to circumvent the requirement of substantially equal
periodic payments (SEPP) throughout your lifetime by using an unreasonably high
interest rate.
72(t) withdrawals setup prior to January, 2003, had some flexibility in the
choice of the reasonable rate to use. However, in 2002, the IRS issued new
rules stating that only rates less than or equal to 120% of the Federal
Mid-Term rate would be considered reasonable. You are now required to use a
rate that less than or equal to 120% of the Federal Mid-Term rate.
Substantially Equal Periodic Payments (SEPP)
The rules for 72(t)/(q)
distributions require you to receive Substantially Equal Periodic Payments
(SEPP) based on your life expectancy to avoid a 10% premature distribution
penalty on any amounts you withdraw. 72(t) payments must last for five years or
until you are 59 1/2, whichever is longer. Further, the SEPP amount must be
calculated using one of the IRS approved methods which include:
Required minimum distribution method: This is the simplest method for
calculating your SEPP, but it also typically produces the lowest payment. It
simply takes your current balance and divides it by your single life expectancy
or joint life expectancy. Your payment is then recalculated each year with your
account balance as of December 31st of the preceding year and your current life
expectancy. This is the only method that allows for a payment that will change
as your account value changes. Even though this may provide the lowest payment,
it may be the best distribution method if you expect wide fluctuations in the
value of your account.
Fixed amortization method: With this method, the amount to be
distributed annually is determined by amortizing your account balance over your
single life expectancy, the uniform life expectancy table or joint life
expectancy with your oldest named beneficiary.
Fixed annuitization method: This method uses an annuity factor to
calculate your SEPP. This is one of the most complex methods. The IRS explains
it as taking the taxpayer's account balance divided by an annuity factor equal
to the present value of an annuity of $1 per month beginning at the taxpayer's
age attained in the first distribution year and continuing for the life of the
taxpayer. For example, if the annuity factor for a $1 per year annuity for an
individual who is 50 years old is 19.087 (assuming an interest rate of 3.8%
percent), an individual with a $100,000 account balance would receive an annual
distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the
mortality table published in IRS Revenue Ruling 2002-62, which is a non-sex
based mortality table. Please note that your annuitized SEPP is based on your
life expectancy only, and is not based on the age of your beneficiary.
In addition, on October 3rd, 2002, the IRS ruled that you could change your
distribution type one time without penalty from the Annuitized or Amortized
methods to the Required Minimum Distribution method. This would allow account
holders the option to move from a fixed payment type to a payment that
fluctuates annually with the value of their account. The primary reason for
this exception is to allow individuals who have suffered large losses, the
option to reduce their distribution to prevent their retirement account from
being prematurely depleted. For more information on this important exception
please see Revenue
Ruling 2002-62 on www.treasury.gov .
If payments are changed for any reason other than death or disability before
the required distribution period ends, the distributions may be subject to a
retroactive application of the Premature Distribution penalty. It is 10% (plus
interest) for all years beginning the year such payments commenced and ending
the year of the modification. It is important to remember that while 72(t)
distributions are not subject to the 10% penalty for early withdrawal, all
applicable taxes on the distributions must still be paid. Further, taking any
early distributions from a retirement account reduces the amount of money
available later during your retirement. Please contact a qualified professional
for more information.
Account balance
The account balance used to determine
the payment must be determined in a reasonable manner. For example, with a
first distribution taken on July 15, 2003, it would be reasonable to determine
the account balance based on the value of the IRA from December 31, 2002 to
July 15, 2003. For subsequent years, the same valuation date should be used.
Your age
This is your current age. Use the age you will
turn on your birthday for the year you are receiving the distribution.
Beneficiary age
This is your beneficiary's age. Use the
age your beneficiary will turn on their birthday for the year you are receiving
the distribution. This entry is ignored if you do not use your Joint Life
Expectancy to calculate your SEPP.
Choose life expectancy tables
There are three different
life expectancy tables that the IRS allows you to use when calculating your
SEPP with the "Fixed Amortization" or the "Required Minimum Distribution"
methods. It is important to note that once you have chosen a distribution
method and life expectancy table, you cannot change either throughout the
course of your distributions. (Except for a one-time change from the Annuitized
or Amortized methods to the Life Expectancy method, see SEPP definition for
more details). The three life expectancy options are:
Table
Description
Uniform Lifetime
This is a non-sex based table developed by the IRS to simplify minimum
distribution requirements. The uniform lifetime table estimates joint
survivorship, but does not use your beneficiary's age to determine the
resulting life expectancy. This table can be used by all account owners
regardless of marital status or selected beneficiary.
Single Life Expectancy
This is a non-sex based life expectancy table. This table does not use your
beneficiary's age to calculate your life expectancy. This table can be used by
all account owners regardless of marital status or selected beneficiary.
Choosing single life expectancy will produce the highest distribution of the
three available life expectancy tables.
Joint Life Expectancy
This is also a non-sex based life expectancy table for determining joint
survivorship using your oldest named beneficiary.
