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August 04, 2002 at 08:00 PM
The life expectancy distribution exception primarily requires the funds to be taken based on: 1) the clients life expectancy; and, 2) continuing for a specified period of time.
The timeframe for these withdrawals must be for the greater of 5 years or the clients attaining age 59.
It is in this way that Congress and the IRS discourage individuals from utilizing their retirement accounts for short-term withdrawals. Taking distributions early requires a taxpayer to make a fairly substantial, but not insurmountable, commitment. Failing to meet these requirements will retroactively trigger the 10% premature distribution penalty on all past distributions.
The IRS has been fairly liberal when it comes to measuring a clients life expectancy. Although the Tax Code gives relatively little guidance, the IRS issued Notice 89-25 some years ago. That Notice set the standard for these calculations by detailing three key methods:
Life Expectancy Method. Similar to that used for IRA required minimum distributions. The life expectancy is determined in the first year of the distributions and reduced by one for each subsequent year. The factor is applied against the prior year-end account balance. As with IRA distributions, this amount increases annually as life expectancy is adjusted.
Amortization Method. The account balance is amortized over the clients life expectancy utilizing a reasonable interest rate.
