Advanced Underwriting Consultants

Question of the Day – February 16

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a 45 year old client who wants to access money from her IRA prior to age 59 ½.  I think she can avoid the 10% premature distribution penalty on money she receives if she annuitizes the IRA for 15 years certain.  Am I right?

Answer: No.

Distributions that are “part of a series of substantially equal periodic payments (sometimes called a SEPP) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and his designated beneficiary” are exempt from the penalty tax.  See Revenue Code Sec.72(t)(2)(A)(iv).

The IRS issued Revenue Ruling 2002-62, addressing rules governing this exception to the 10% penalty.  The ruling sets out three acceptable methods for determining payments under a series of substantially equal periodic payments:

(1) the required minimum distribution (RMD) method,

(2) the fixed amortization method, and

(3) the fixed annuitization method.

Each of the three methods requires use of a life expectancy table. The taxpayer can elect

  • the Uniform Lifetime Table,
  • the single life expectancy table, or
  • the joint and last survivor table.

Once chosen the table cannot be changed from year to year.

Under each of the tables, the life expectancy of a 45 year old taxpayer is substantially longer than 15 years.  Thus, annuitization of the IRA for a 15 year period certain payout will fail the “substantially equal periodic payments” test.

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