IRA Distributions Based on Joint Life Expectancies and AFR Will Be "Substantially Equal Periodic Payments"

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(t)(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 Regs. 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 59¹/2, 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 last survivor expectancies for two lives (Table VI).

In the absence of regulations on Sec. 72(t), Notice 89-25 provides guidance on the exception to the tax on premature distributions provided under Sec. 72(t)(2)(A)(iv), in question-and-answer form. Q&A-12 of the notice provides three methods for determining substantially equal periodic payments for purposes of Sec. 72(t)(2)(A)(iv). Two of these methods involve the use of an interest rate assumption that must be an interest rate that does not exceed a reasonable interest rate on the date payments start.

Proposed Methodology

The proposed method for determining periodic payments described in the ruling request is to calculate an end-of-year annual distribution amount for 2001 by amortizing the total of the aggregated account balances of IRAs 1, 2 and 3 as of Dec. 31, 2000 over a term certain, equal to the joint and last survivor life expectancy for T and his wife, obtained from Table VI of Regs. Sec. 1.72-9 (as set forth in Table II of Appendix E in IRS Publication 590), using the ages attained by T and his wife in 2001, and an interest rate equal to 6.36% (110% of the annual long-term applicable Federal rate used for Sec. 1274(d) purposes, in effect for January 2001). The same annual distribution amount will be distributed in subsequent years. All distributions come from one or more of IRAs 1, 2 or 3, and only from these IRAs.

Conclusion

The life expectancy and interest rate used are such that they do not result in the circumvention of the requirements of Sec. 72(t)(2)(A)(iv) and (t)(4) (through the use of an unreasonable life expectancy or an unreasonably high interest rate). Accordingly, the proposed method of determining periodic payments satisfies one of the methods described in Notice 89-25 and results in substantially equal periodic payments within the meaning of Sec. 72(t)(2)(A)(iv). Such payments will not be subject to the additional tax of Sec. 72(t), unless the requirements of Sec. 72(t)(4) are not met.

IRS Letter Ruling 200131035 (5/11/01)