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Annual recalculation using the amortization method
5 years ago a CPA created a plan for me to start a SEPP with annual recalculation using the amortization method.
He informed me that every January 1st I would need to acquire three pieces of information: 1) my 12/31 IRA account balance. 2) the November and December 120% of the mid-term applicable federal rate - taking the highest % of the two. 3) single life expectancy from IRS Publication 590-B.
Every year I have taken this information and plugged it into a 72t calculator and pulled the amortization amount out of my IRA. After doing some research, I fear I cannot use the amortization method for annual recalculation. Can anyone verify that I can use the amortization method for annual recalculation? If not, I assume my plan is busted and I will have to pay 10% + penalties on my previous distributions. The CPA has retired so I cannot ask them.
What did you find in your research that leads you to believe that you can no longer use the Amortization Method, and that you would therefore have busted your plan retroactively ?
Also, you did not indicate your age/DOB. If you are now over 59 1/2, and have been in the plan for 60 months, then your plan has automatically terminated, and you can stop distributions, or make any changes in the amount that you distribute.
Thank you for your replies. I am 47 years old.
I recently came across something very similar to IRB 2002-42 ISSUED 10/21/2002, page 710, section 2 - methods. Very similiar to what you wrote above - It said Amortization is fixed and is calculated initially, and never changes. Where as, RMD does an annual recalculation.
Here's what is written in my plan when I started in August, 2014:
Accordingly, the computations for your new single SEPP plan are:
(1) Account balance: $358,474.94 (2) Your highest attained age in 2014 is 42. Using age 42, we learn that your single life expectancy is 41.7 years. (3) The interest rate maximum is a moving target. The maximum allowable interest rate is the higher of the 120% of the mid-term applicable federal rate for either of the two months preceding the month in which the first cash distribution is made. Presuming that your first planned distribution will occur in August, 2014. 120% of the MT/AFRs for June, 2014 and July, 2014 are 2.29% and 2.18% respectively. Therefore, we can use 2.29% for distributions commencing in August, 2014...your annual distribution amount for 2014 is $13,435.61
Next, based on the length of your SEPP plan as well as the discretionary nature of the amounts distributed, you have indicated a desire to adopt an annually recalculated amortization plan as your methodology. As we have discussed, annual recalculation has both upside and downside risks. Furthermore, an annually recalculated plan must be recalculated each and every year. In your case, I recommend, that you adopt January 1st of each year as your recalculation date. Thus, on January 1, 2015, you will need to acquire three new pieces of data: (1) your 12/31/2014 account balance (let's assume it is $360,000), (2) the 11/2014 and 12/2014 120% of the mid-term applicable federal rate (again, let's assume it remains relative flat at 2.3%) and (3) your 2015 life expectancy (because you have aged a year this number drops from 41.7 to 40.7). With these new data, you will need to recalculate you 2015 annual distribution amount. Using my example amounts this would be $13,716.20.
I had asked him how I could get the most amount of money from a growing IRA account and he suggested Amortization that is recalculated every year. As you can see from the bolded example, he recalculates 2015 using the Amortization method and that is what I have been doing ever since.
So am I to assume my plan is busted and I will have to pay 10% + penalties on my previous distributions?
I do not believe that you have done anything wrong, and I do not believe that your plan is busted. The only thing that is wrong is his/your use of the term "AMORTIZATION" to describe your plan method. As stated on page 710 of the IRB 2002-42, you have been correctly calculating your SEPP 72-T Required Annual Distribution under the REQUIRED MINIMUM DISTRIBUTION method. No where in the wording that you stated above is there a term for the method that you are using. The only "error" was the CPA's terminology that he stated to you. HIS use of that term is immaterial, because that is not the plan that you have used.
Relax, sleep well, and continue to do what you have been doing by recalculating your RMD every year, which is the same method that everyone is required to use when they reach 70 1/2 under current law (which will become 72 under proposed or new law).
An excerpt from IRB 2002-42 is now available on 72tNET.com under IRS Resources or at this link. These 2 pages describe the three 72t calculation methods as well as other rules such as the one time change rule.