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Treasury Grants A One-Time Exception As 72(t) Rules Are Modified

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The Treasury Department is lending a hand to early retirees who may have been bitten by the downturn in the equities markets.

Revenue Ruling 2002-62 makes changes that apply to individuals who have begun taking distributions from a “qualified retirement plan” prior to age 59.

Under code section 72(t)(2)(A)(iv), distributions that are considered part of a series of substantially equal periodic payments for the life expectancy of an individual, or joint life expectancy of an individual and beneficiary, are not subject to the 10% penalty tax for early withdrawals. (See related article, NU, Aug. 5, page 8.)

The IRS has sanctioned three methods by which individuals can withdraw funds from their retirement accounts. These three methods are: amortization, annuitization, and life expectancy minimum distribution.

Prior to 2002-62, once an individual selected one of these methods, it could not be changed for the later of 5 years or attained age 59. Otherwise, a retroactive 10% early withdrawal penalty would apply, in addition to interest charges on distributed amounts.

But given the recent downturn in the market, the Treasury Department recognized that these individuals need some relief, and is allowing a one-time change from either the amortization or annuitization method to the life expectancy minimum distribution method.

Since two of the three sanctioned distribution methods result in a fixed payment (amortization and annuitization) that would not change year to year, individuals who select one of these options are locked in for at least 5 years, according to James Schomburg, second vice president advanced markets for The Phoenix Companies Inc., Hartford, Conn.

Thus, individuals who began receiving distributions before the steep slide in the market and who are currently locked in may be liquidating retirement assets prematurely, which is resulting in faster depletion of their retirement account.

“I think its welcome relief for people who have been taking payments and have been watching their accounts dwindle while their payments stay the same,” says Schomburg.

He describes the situation like this: “Someone calculates a payment when they have $1 million in their account, and they are required to take $100,000 a year for 7 years. Now, after just 3 or 4 years, the account is only worth $500,000 and they are still pulling out $100,000 a year. Theres a problemtheyre going to run out of money.”

Revenue Ruling 2002-62 now provides these people with an opportunity to change this.

“What people can do now is make a one-time election out of the annuitization or amortization approach that they may have previously elected, and go into a life expectancy approach with a recalculation each year,” says Mark Teitelbaum, second vice president, advanced sales at Travelers Life & Annuity, Hartford, Conn.

The result for the individual is that annual distributions are recalculated every year based on the current account balance, which for many investors has dropped significantly in the last 2 years.

“This allows you to rethink what you did a few years ago,” adds Schomburg.

But while the new ruling is giving individuals in this situation an opportunity to reduce their distributions, Teitelbaum notes that people may actually need the income they were planning on taking.

“Its a one-time election that cant be reversed,” he says.

Teitelbaum says the question is whether or not these individuals want to slow down their distributions, “knowing that they may not be getting all the money they need.”

If they need the income, then they may be trapped, adds Schomburg.

“But if they dont, they might be able to rescue the account balance by switching methods,” he says.

Experts agree that any time there is a change in tax laws, its a good opportunity for agents to revisit clients who may be affected.

“For those clients that are currently in a distribution mode, its important to explain to them that they have a choice, and what the implications of that choice are,” says Teitelbaum.

He adds that for some clients, this may be a non-issue, but visiting them and explaining the changes will only help the client relationship.

“If they dont hear it from their producer, theyll probably hear it from their CPA at tax time,” he says.

For a copy of Revenue Ruling 2002-62, visit

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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