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Question: I have a client who has been receiving “substantially equal payments” from her IRA since she has been age 50. I am proposing setting her up in an immediate annuity with part of her IRA that will pay her the exact same amount she is getting now for a 5 year period which will take her beyond age 59 1/2. Will this still qualify under the “substantially equal payments” rule?
Answer: There’s not a 100% certain answer to the question, unfortunately.
The proposed action makes logical sense, and seems consistent with the spirit of the 72(t) “substantially equal series of payments based on life expectancy” exception. However, there is some troubling language in Revenue Ruling 2002-62, which the IRS could apply to the situation in an adverse way.
Here’s the language from the Revenue Ruling:
a modification to the series of payments will occur if, after such date, there is
(i) any addition to the account balance other than gains or losses,
(ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or
(iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.
An annuitization of a portion of the account might be considered a “nontaxable transfer of a portion of the account balance,” invalidating the entire set of 72(t) distributions. It’s not clear that the IRS would decide that way, but we can’t predict for sure.
The only way to get a sure opinion is for the client to ask for a private letter ruling. The second best way is for the client’s CPA to think over the issues, review my analysis above, and decide that the CPA is comfortable with the client taking the tax risk.
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