IRA distributions based on joint life expectancies and AFR will be "substantially equal periodic payments".

• Author: Fiore, Nicholas J.
• Position: Employee Benefits and Pensions

T plans to retire and wants to start receiving distributions from IRAs 1, 2 and 3, beginning in 2001. T will attain age 52 in 2001. He wants to avoid the additional 10% tax, imposed under Sec. 72(0(1) on early distributions, by using the exception provided in Sec. 72(t)(2)(A)(iv) for "substantially equal periodic payments." An annual distribution amount for 2001 is calculated by amortizing the aggregated account balances of IRAs 1, 2 and 3 as of Dec. 31, 2000, over the number of years equal to the joint and last survivor life expectancy for T and his wife, obtained from Table VI of Kegs. Sec. 1.72-9 (as set forth in Table II of IRS Publication 590), using an interest rate of 6.36%. The same annual distribution amount will be distributed in subsequent years. All distributions will be taken from one or more of IRAs 1, 2 or 3.

Analysis

Sec. 408(d) provides that amounts paid or distributed from an individual retirement plan must be included in gross income by the payee or distributee in the manner provided under Sec. 72.

Sec. 72 provides rules for determining how amounts received as annuities, endowments or life insurance contracts and distributions from qualified plans should be taxed. Sec. 72(t)(1) provides for the imposition of an additional 10% tax on early distributions from qualified plans, including IRAs. The additional tax is imposed on that portion of the distribution includible in gross income.

Under Sec. 72 (t)(2)(A)(iv) , Sec. 72(t)(1) does not apply to distributions that are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his beneficiary.

Under Sec. 72(t)(4), if the series of payments is subsequently modified (other than by reason of death or disability,) before the later of (1) the close of the five-year period beginning with the date of the first payment and (2) the employee's attainment of age 59 1/2, the taxpayer's tax for the first tax year in which such modification occurs is increased by an amount determined under regulations, equal to the tax that would have been imposed except for Sec. 72(t)(2)(A)(iv), plus interest for the deferral period. Regs. Sec. 1.72-9 tables are to be used in connection with computations under Sec. 72 and the regulations thereunder. Included in this section are life expectancy tables for one life (Table V) and for joint life and...