Magazine article The CPA Journal

IRA Distribution Technique Avoids 10% Sec. 72(T) Tax

Magazine article The CPA Journal

IRA Distribution Technique Avoids 10% Sec. 72(T) Tax

Article excerpt

A client, age 55, is the owner of an individual retirement account with a fair market value of 2.1 million dollars. He earns $250,000 a year, is married, and has two children, one age 16 and the other age 13. He would like to commence distributions from his IRA in an amount that would provide for the college education expenses of his children, approximately $35,000 per year. His wife is 53 years old and is the beneficiary of his IRA.

Sec. 72(t) generally imposes an additional 10% income tax upon recipients of distributions from IRAs and qualified retirement plans before age 59-1/2. An exception to the 10% tax is available to a recipient who receives distributions as part of a series of substantially equal periodic payments not less frequently than annually over his life expectancy or the joint life expectancy of the recipient and his spouse.

Avoiding the Additional 10% Tax

In Notice 89-25, the IRS developed a variety of mechanisms under which distributions can be computed in order to satisfy the exception from the 10% income tax. For example, computation of the annual distribution by dividing the account balance by the joint life expectancies of the owner and his or her spouse based upon the tables found in Reg. Sec. 1.72-9 will satisfy the statute. Given the fair market value of our client's account balance and the joint life expectancies of the client and his spouse (35.4 years), annual distributions would equal $59,322. This exceeds their needs by almost $25,000.

In PLR 8946945, IRS provides a technique for reducing the amount of annual distributions while still satisfying the requirements of the statutory exemption. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.