Annual Recalculation Revisted

L1: Annual Recalculation RevistedSome months ago I wrote Annual Recalculation Is Back With A Vengeance۝. Evidently, I do not write as clearly as I thought I did, so let’s review the rules:
1. The first year calculation is done normally using either the amortization or annuitization method; using (a) your account balance; (b) 120% of the mid-term applicable federal rate; ) your life expectancy.
2. Pick a date, any date, in the second year on which to recalculate. In a moment you’ll see why 1/1/XX is the favorite.
3. On that date in the 2nd year, recalculate your annual distribution using the same methodology as in (1) above but updating all three variables: account balance, interest rate and life expectancy.
4. Distribute the 2nd year annual distribution amount sometime during the remainder of year 2 after the recalculation date chosen.
5. For year 3 and so forth, repeat steps (3) and (4) above.
There are several issues that seem to come up repeatedly:
1. Can I use the fixed amortization method for years 1 & 2 and switch to annual recalculation in year 3? NO. When adopting annual recalculation, all years must be calculated/recalculated so that the methodology adopted remains the same for all plan years.
2. Can I pick 6/30/XX as my annual recalculation date. YES, however, this might not be wise in that distributions in any one year can not precede the annual recalculation date; thus, in this example, no distributions can be made for the period 1/1/XX to 6/29/XX.
3. Can I switch life expectancy tables between recalculated years? NO as this would be a methodology change.
4. Can I switch from an annually recalculated amortization plan to the required minimum distribution method. NO, Revenue Ruling 2002-62 only allows switching to the RMD method from fixed amortization / annuitization plans.
Hope this helps.
TheBadgerwjstecker@wispertel.net2005-04-22 10:18, By: TheBadger, IP: [66.250.23.21]

L2: Annual Recalculation RevistedGood Summary 2005-04-22 10:31, By: Gfw, IP: [172.16.1.73]

L2: Annual Recalculation RevistedTheBadger,
I’m confused by point number 2. I thought the first recalculation date was always one year from the origination date of the distributions.
For example if I started a 72t distribution on 6/30/04, I could use my IRA balance on 12/31/03 and the interest rate posted for May 2004. Then I thought the recalculation in 2005 must use the IRA balance as of 12/31/04 and the interest rate posted for May 2005. I also thought that it did not matter what distributions or their date I took in 2005 as long as the total taken for 2005 equaled the amount derived from the recalculation.
Thanks.
Fred2005-04-25 14:27, By: Fred, IP: [68.52.85.218]

L2: Annual Recalculation RevistedHello Fred:
Actually, the reverse of what you suggest actually occurred in the three PLRs issued so far on this subject:
1. Taxpayers took 1st distribution in the fall of 2003 taking either a full annual distribution or a prorata distrubtuion for that year.
2. All cases then selected 12/31/03 as their first recalculation date essentially saying:
a. 12/31/03 and 1/1/04 are the same value.
b. Used the 12/03 120% of MT/AFR for their interest rate
c. Used single life expectancy based on their highest attained age in 2004.
Within these rulings the IRS seemed to more-or-less take a pass on the whole issue of using an interest rate from the two months prior to month in which the 1st distribution takes place. They seems much more interested in the consistency of methodology application. E.g. taking the facts above, let’s assume the taxpayer does the computation as of 12/31/XX but neglects to actually take a distribution for the year in question until June. The IRS seemed not to care focusing on the updating of all three variables simultaneously.
TheBadger
wjstecker@wispertel.net
2005-04-25 14:38, By: TheBadger, IP: [66.250.23.24]

L2: Annual Recalculation RevistedThanks for the clarification.
I am currently waiting for enough cash to build up from investments in one of my IRAs to start a 72t distribution for this year. Also since the interest rates have been rising and thus increasing the distribution amount, I haven’t been in a big hurry to start. I will probably pull the trigger in the next couple of months. With that in mind, it sounds like I could start anytime this year using my 12/31/04 balance, 120% of MT/AFR for either of the prior two months, my age attained this year, and take a full year distribution. I have not made any contributions or taken any distributions to the IRA in 2005 so the 12/31/04 balance should be fine to use for the 2005 distribution. Then I can recalculate the 2006 distributions using the balance on 12/31/05, the 12/05 120% of MT/AFR, and add a year to my age.
That certainly does make it a lot simpler to recalculate on 1/1/XX every year rather than keeping track of what was the original start date, the balance date, and the interest rate date you used in order to keep everything consistent and safe with the IRS.
Thanks again for this great site and all the helpful contributors. I keep introducing this site to CFPs , financial planners, and friends.
Fred2005-04-25 19:51, By: Fred, IP: [68.52.85.218]