72t using life expectancy, 55 yr old – a factor of 29.6
I have a new client that began a 72t distribution in 2007 using a divisor of 29.6 on a balance in her IRA of $532,800.
I have not used this method in the past. Instead I’ve used the amortization or the annuity method. I calculated both of these methods using “number cruncher” software.
Can anyone share with me their understanding of the requirements for 2008 and future years using the life expectancy method? Should the 12/31/07 IRA balance be divided by a new factor (see below) or does the montly income that was initiated continue for the 5 years from the start date unchanged?
I am attempting to determine if the factor in 2008 is -1 from the 29.6 or is the factor for a 56 year old of 28.7 used for 2008.
Secondly, I’m concerned that since the 2007 distributions began in July I am unsure if the full $18,000 (532,800 divided by 29.6) should have been distributed in 2007.
Permalink Submitted by Alan Spross on Fri, 2008-01-04 21:24
Yes, the 12/31/07 balance should be used and the current year’s life expectancy from the table used to determine the 2007 distribution. There is a choice of tables, but if the single life table is used, the same table applies in subsequent years. The following is copied from RR 2002-62 re the RMD method:
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(a) The required minimum distribution method. The annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year. If this method is chosen, there will not be deemed to be a modification in the series of substantially equal periodic payments, even if the amount of payments changes from year to year, provided there is not a change to another method of determining the payments.
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Note that the RMD method produces a much lower annual payment for the same account balance than the other methods. so is less frequently used. It also removes the option of the one time switch to the RMD method for obvious reasons.
Since 29.6 was used for 2007, the table used was the Single Life expectancy table. Therefore, 28.7 would apply for 2008 and this table must continue to apply.
Finally, for 2007 which is the first year with a July initial payment, taxpayer has a choice of taking either the full annual amount (18,000) or 50% of that amount (9,000), so this appears in order.