Academic journal article Journal of Accountancy

Early Retirees Can Enjoy COLAs

Academic journal article Journal of Accountancy

Early Retirees Can Enjoy COLAs

Article excerpt

In the past, if a taxpayer took a distribution from a traditional IRA account before he or she reached age 59 1/2, the withdrawal was generally subject to a 10% penalty. Under IRC section 72(t)(2)(A)(iv), however, IRA account owners who retire early can avoid this penalty by electing to receive their distributions in a series of equal periodic payments.

To take advantage of this provision, taxpayers must determine an annual payment amour, t at the time of retirement. When choosing an annual payment, taxpayers should take into account their current IRA balance, the projected future earnings the account will generate and their life expectancy.

In PLR 199943050, a 50-year-old taxpayer took early retirement, rolled over his corporate pension into an IRA and began taking equal periodic payments. After a few years, the IRA doubled in size because the stock market outperformed his prior expectations. The taxpayer asked the IRS if it was possible to modify his payment plan by adding an annual 4% cost-of-living adjustment (COLA) and by including a one-time "catch-up" amount. The IRS denied the request. It held the taxpayer could not modify the annual payment without triggering the 10% penalty for premature distributions.

Observation. There are ways early retirees can make their IRA payments keep pace with the market and not incur the 10% penalty. …

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