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# Beware Online Amortization & Annuitization Calculators

Posts: 11
Topic starter
(@wjsteckerwispertel-net)
Estimable Member
Joined: 4 years ago

DANGER --- DANGER --- DO NOT TRUST ONLINE CALCULATORS UNTIL YOU ARE SURE

There are lots of  §72(t) calculators out on the Internet.  I am 99% certain that the amortization calculators are right --- the math is too easy to get it wrong; however some are a little slow in adopting the new life expectancies as published in TD 6690.  So, test a calculator before you rely upon it:  \$1mm/1.5%/50 year old single life is now \$36,001.45.

Several online sites have more seriously erred by updating their amortization life expectancy tables but have failed to update their mortality tables used in the annuitization system.  Again, test them first.  \$1mm/1.5%/50 year old is now \$35,785.84 with an annuitization factor of 27.9440.  Since there are a lot of numbers in a mortality table even I can make a mistake so if you get a number within a dollar I would say the calculator is correct. Dead bang wrong is when the annuitization result is greater than the amortization result.  It can not be remembering that amortization computations are "in arrears" whereas annuitization calculations (mortality based) have the implied mid-year death of the annuitant.

William J. Stecker, CPA

The Marble Group, Ltd.

(312) 361-0221

wjstecker@wispertel.net

2 Replies
Posts: 3
(@gryphon)
Eminent Member
Joined: 11 months ago

Good advice. Before starting my 72t (back in 2017) using the amortization method, I used 2 different online calculators AND Excel AND did it by hand with a calculator. When I got the same answer all 4 times I felt confident it was correct.

Posted by: @wjsteckerwispertel-net

[...] amortization computations are "in arrears" whereas annuitization calculations (mortality based) have the implied mid-year death of the annuitant.

So that's the difference between those two. I always wondered what made the annuitization method slightly different.

Posts: 11
Topic starter
(@wjsteckerwispertel-net)
Estimable Member
Joined: 4 years ago

Just a not-so-brief UPDATE: Notice 2022-6 has what I consider to be a material error in it:  page 2 .05 " Notice 89-25 ...provides that payments...[are good] if made in accordance with... (1) the required minimum distribution method; (2) the fixed amortization method; or (3) the fixed annuitization method."  THIS IS AN INCORRECT QUOTATION and is therefore a mis-cite of law in particular regards to points (2) and (3).  Notice 89-25 does, for the 1st time introduce us to the three methods and in general how they have different mathematical structures.  Notice 89-25 NEVER USES THE WORD:  "FIXED".  Furthermore, we do not get the word "fixed" until 2.01(b) and (c) of Revenue Ruling  2002-62 which also has the equivalent of the same implied error.  We believe the absence of the word "fixed" to have been intentional, particularly if one were to review the legislative history during the passage of the Tax Reform Act of 1986 (there were lots of ideas floating around then such as relative and fixed COLA'ed plans, etc.  All of which lead to the eventual use of the word "substantially".)  Congress's intent at the time (as found in the JCT minutes) was to prevent / discourage taxpayers from using their retirement accounts as checking accounts and potentially ruining their long-term financial safety.  If Congress meant "fixed" they would have said so or dropped "substantially" and put in "identical".

In summary, the IRS would like you all to believe that the amortization and annuitization methods are fixed in the meaning of calculate the result once and distribute the same amount for all years in the SEPP plan.  Certainly this is an available interpretation; but it is not the only interpretation or even best interpretation.  Thus, this is just not true to the point that at least I (you are free to differ) consider it to be intentionally misguiding.

We take a different view.  Notice 89-25 does give us three methods (and let's presume there are only three).  The minimum method requires annual recalculation so it is not a new concept. The amortization and annuitzation methods can easily lead you to believe they are "fixed" but are not and do not say so --- instead they are silent on this issue.  Therefore using Notice 89-25 as chapter one of the SEPP bible; we actually see six methods; not three:  (1) minimum with an interest rate of zero; (2) minimum with an interest rate greater than zero; (3) fixed amortization; (4) annually recalculated amortization; (5) fixed annuitization; (6) annually recalculated annuitization.  As an aside (2) and (4) are mathematically computed in the same manner.

Rev. Rule 2002-62 more-or-less perpetuates this disguise and 1st introduces us to the word "fixed".  Therefore we have always viewed section 2 of RR 2002-62 as an expansion / clarification of Notice 89-25; not and elimination of rights as found in Q&A-12 of Notice 89-25.  As a result, there were  a good 1/2 dozen PLRs issued between 1989 and 2000 explicitly clarifying and approving methods (4) and (6) above based on the less than full language Notice 89-25 should have had.  Then, the IRS had a 2nd opportunity with the issuance of RR 2002-62 and again failed.  As a result we find 9 more PLRs issued  between 2004 and 2006 doing the same thing --- explicitly approving annual recalculation. I guess us "recalc" fans just wanted to make sure we were still on solid ground.

Notice 2022-6  was the IRS's 3rd opportunity to get it right --- sorry; three strikes and you are out.  Not only did they not fix the recalculation issue; they mis-cite the originating authority on this issue.

In summary, we are of the belief that there are really five substantively different methods: see para 3 above; methods (1), (3), (4), (5) and (6).  We further assert we can immediately eliminate three of the 5 as being worthless: (1), (5) and (6).  (1) is worthless as we always hold the method switch to (1) in reserve for a later date.  (5) and (6) are difficult to compute correctly (annuitant factors based on mortality tables are not rocket science but they generally do require a little help from an actuary) AND (5) and (6) always produce smaller comparative results than (3) and (4) --- therefore don't bother trying to use them.

So, we are still left with two operative methods or one method with two different implementations:  fixed amortization and annually recalculated amortization.  Both methods have pluses and minuses which should be carefully weighed in light of one's particular financial situation and objectives.

I invite comment; both for and against.

William J. Stecker, CPA

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