SEPP One-time switch
An individual is taking Substantially Equal Periodic Payments on a March-February year under the amortization method. This individual started distributions in March ’07 and will need to continue through ’12 (the year they turn 59 1/2). The distributions are made in $2,000/month increments, every month.
The individual wants to do a one-time switch to the RMD method so that their distribution amounts are reduced. How is this done?
The regulations are unclear as to whether the individual can just “stop” the amortized payments this month and start in October with the RMD method and a new 12-month cycle (October-September) or if they have to wait until the final payment for this “year” has been made in February and then make the switch beginning in March.
Any insight?
Permalink Submitted by Alan Spross on Wed, 2009-09-02 21:40
I guess the first issue here is to clear up the fiscal year impression. If the individual files their 1040 on a calendar year basis, then their 72t plan is also on a calendar year basis and will be in sync with 1099R reporting. For the first CY of 2007, since the first distribution was done in March, they had the option of taking out 10 months or the full CY amount. Since they have been taking monthly payments since 3/07, if the calculations were correct, there should be no problem to date. On the other hand, the very round number of 2,000 per month is worrisome, since it is not easy to arrive at such a round number unless a reverse calculator was used to determine what account balance would produce that exact amount, and then to have the IRA partitioned such that the exact account balance was created. This can be done, but is somewhat rare, so hope this plan was in compliance to begin with.
SInce the RMD method is essentially a CY method, it is best done effective in January using the prior YE account balance. The switch will typically produce a much lower annual distribution along with the need to complete a new calculation each January under the RMD method. The critical question is whether they can live on the much reduced RMD calculation amount until the plan ends, which is the same date it would have ended without making the switch.
It is easy to retroactively make the switch early in the year, but by now they have already taken out at least 16,000 for 2009. This is probably more than what is allowed under the RMD method, so they probably have to wait until Jan, 2010 to make the switch. While the IRS has not clearly ruled against making a mid year switch, I consider it very risky and highly likely to at least produce an IRS inquiry into the rationale used in making a mid year switch. Therefore, they should continue the 2,000 monthly distributions thru Dec, 09 and then make the switch effective 1/1/2010 using the 12/31/09 account balance. Each January they will re calculate using their new age to be attained for the CY and the 12/31 account balance. They should also use the single life table and not be concerned with joint life expectancies and beneficiaries since this will only further reduce the allowed payment. On their 2010 tax return, it would be advisable to attach a statement that the one time switch to the RMD method is the reason for the changed distribution amount.