Planning for large balance IRAs offers the possibility of using the after-tax distribution payouts as annual premiums for life insurance or for long-term care insurance policies. Of course, pre-59½ distributions must satisfy the “substantially equal periodic payment” (SEPP) rules of IRC Section 72(t) to avoid the additional 10 percent penalty tax for premature distributions. And post-70½ distributions must satisfy the “required minimum distribution” (RMD) rules according to the Uniform Lifetime Table to avoid the 50 percent penalty tax on “under distributions.”
But what happens when a client owns multiple IRAs? How are the pre-59½ rules and the post-70½ rules impacted by the ownership of multiple IRA accounts? These multiple IRA accounts could have underlying financial assets in the form of mutual funds, deferred annuity contracts, or bank CDs.
Actually, the management of distributions from multiple accounts is fairly simple:
Pre-59½ distributions from multiple IRA accounts
For pre-59½ distributions, multiple IRAs may be aggregated for purposes of calculating SEPP. They are not required to be aggregated (See PLR 9705033). In other words, you can pick and choose which accounts to add together for purposes of selecting which of the three permitted distribution methods to use: amortization method, annuitization method, or life expectancy fractional method using either the Uniform Lifetime Table or the Single Life Table. These three permitted methods are detailed in Rev. Rul. 2002-62.
Once the dollar amount of the SEPP is calculated using one of these three methods, the actual distribution can be made from any of the aggregated accounts — or from just one of the accounts, if desired. Keep in mind that the SEPP using either the amortization method or the annuitization method is a level amount that must be paid for at least five years or until age 59½, whichever comes later.
example: Mrs. Dozier is 55 years old and has held management positions at various high-tech firms for the last 25 years. Each time she left a firm, she executed a direct transfer of 401(k) accounts to her own IRAs. She currently has two IRA accounts: Account No. 1 is worth $550,000 and is invested in various mutual funds with a well-known investment firm; account No. 2 is a bank CD worth $150,000 and is earning a low yield of 1.75 percent.
She would like to buy a flexible five pay combination life insurance/long-term care product which has a modest death benefit but provides a mid-six-figure pool of LTC benefits. The guaranteed premium is $20,000 per year for five years. In her tax bracket, she would have to withdraw about $30,000 per year to net the $20,000 needed for annual premiums. She would like to continue to invest for growth in mutual fund equities while drawing down the IRA with the bank to fund the five pay premiums for the life product with LTC rider.
By aggregating the two IRA accounts ($700,000 total), she could take a SEPP using the amortization method of $32,734 per year and avoid the 10 percent penalty tax for pre-59½ distributions. However, the actual withdrawal of $32,734 per year will be made only from the low-yielding IRA at the bank. The $550,000 mutual fund IRA will be left intact to grow into the future to help fund her retirement.