term SPIA to meet 72t
I am an advisor dealing with a age 57.8 retiree who is entitled to receive his pension in a lump sum. Because the dollar amount of the lump sum is greater when the PBGC interest rate factor is lower, he has elected the lump sum now. By adding his 401k balance to the rollover, he will likely be able to attain a monthly payout that will likely exceed the j&s pension option plus 4% w/d from the 401k. We plan to use a SPIA to avoid the penalty pre 59 1/2.
My question is how does a SPIA avoid the calculation using 120% fedral midterm rate. Has the IRS blessed them in a Rev Ruling? And, could he use a 2 year SPIA within a 72t program IRA to meet Rev. Ruling 2002-42?
Permalink Submitted by Alan - IRA critic on Wed, 2014-01-08 20:27
There is a penalty excption for non qualified immediate annuities under 72q, however for qualified plans and IRAs under 72t, the SEPP exception must meet the requirements of RR 2002-62. The annual distribution will be under 5% of the account balance with today’s low interest rates. Payments would also have to continue a minimum of 5 years for a 57 year old. Therefore, the retiree’s best bet is to investigate the age 55 separation from service exception and take money from the 401k until he hits 59.5. He could still do a partial IRA rollover of the amounts he will not need till after 59.5, but leave the amounts he will need in the 401k plan to draw from to get him to 59.5 without paying a penalty. This would only tie him up till 59.5 as well. He should check with the plan administrator to determine what flexible distribution options he has since taking out 2 years worth of expenses could elevate his tax rate.