Is a Stub Year allowed?
L1: Is a Stub Year allowed?If I start a 72t plan on an IRA in June 2010 do I have to take the entire annual calculated ammount in 2010?
I prefer to start monthly payments in June that are 1/12th the calculated annual amount and continue those payments for the next 7 years until I am 59.5. If I do that the first year will be a 7/12 “stub” year.
Vanguard just advised me to keep the annual distributions the same and avoid a stub. I would have to double-up the monthly payments in 2010. If the Vanguard IRA specialist is correct, then a 72t started in December would trigger one big distribution.
2009-12-01 15:17, By: telcoguy, IP: [188.8.131.52]
L2: Is a Stub Year allowed?Yes, you can do a stub year in the 1st year. In the 1st year youhave the option of taking the full annual distribution or a pro-rata distribution based on the number of months remaining in the year – inthe situation you describe,it could be 12/12s or 7/12s.2009-12-01 15:26, By: Gfw, IP: [184.108.40.206]
L2: Is a Stub Year allowed?
If using a stub year, be sure that you also use the 1st payment date modification calendar on this web site. That will ensure that you do not stop taking payments before the SEPP actually ends.
Here is a reference to an article that discusses the Arnold v. Commissioner case:
2009-12-01 16:45, By: Ed_B, IP: [220.127.116.11]
L3: Is a Stub Year allowed?Thanks for the replies. I want to be sure I understand. You are confirming that it is OK to take 7 monthly payments that add up to 7/12 the annual amount in the first “stub” year. In the remaining years I will take 12 monthly payments that add up to the calculated annual amount.
I found a reference to PLR 200105066 and PLR 200106039 that discuss 6 and 11 monthly payments. They seem to confirm that total payment in a short year (using Amortization method) should be less than a full year’s payment.
I may be over thinking this, but could the IRS mean that the 7 payments in my example can or should be increased by a factor of 12/7 to make the stub year’s total equal to subsequent years?
I found this discussion. I hope it OK to paste it into this forum:
Fixed Amortization and Fixed Annuitization Methods
The actuarial formulas used for the fixed
amortization and fixed annuitization methods implicitly provide for precise
calculation of periodic payments such as monthly payments. (It should be noted
that, once calculated, the monthly amount that is distributed must remain
constant.) The IRS has even allowed the use of less precise methodology in some
cases. (For example, see private letter rulings 200105066 and 200106039 that
simply provided for dividing an annual amortization amount by 12 to determine
the monthly payments.) PLR
200105066 provided for a monthly payment that resulted in only six monthly
payments being made in the first year of 72(t) distributions. PLR
200106039 provided for a
monthly payment that resulted in eleven monthly distributions being made in the
first year of 72(t) distributions. It is clear that the IRS has permitted
monthly distributions for a first short year (i.e., less than twelve monthly
distributions are made) of 72(t) distributions. The question then arises
whether Rev. Rul. 2002-62 changes this?
Rev. Rul. 2002-62 (like its predecessor IRS
Notice 89-25) does not deal specifically with cases where payments are made more
frequently than annually. Its language and examples deal with the easiest
casethe annual distribution. Rev. Rul. 2002-62 does reference the not less
frequently than annuallyÛ language of IRC 72(t). Furthermore, Rev. Rul.
2002-62 does not contain any language which changes prior practice regarding
payments made more frequently than annually. Rev. Rul. 2002-62 does not refer
specifically to calendarÛ years. Finally, informal consultation with the IRS
has revealed that payments more frequently than annually (such as monthly
payments) are permitted for a first payment year that is less than a full twelve
months. In fact, informal consultation with the IRS has resulted in the
expressed opinion that payment of a full twelve months distribution amount in a
short first year would be a clear violation of the substantially equal periodic
paymentsÛ requirement for the fixed amortization and fixed annuitization
There is considerable authority that 72(t)
payments more frequent than annual should and must total less than a full year’s
payments for a first (and last) short year when the fixed amortization and fixed
annuitization methods are used. If another position is to be considered that
would result in a higher distribution for the short year, it is recommended that
an application for a private letter ruling be considered. However, it does seem
unlikely that a favorable ruling would be received.
Thanks again for the replies2009-12-02 16:38, By: Telcoguy, IP: [18.104.22.168]
L4: Is a Stub Year allowed?Merely use the annual distribution and divide by 12. ll that is important is that the distribution equals the annual distribution or in the case of a stubyear the pro-rata amount.2009-12-02 16:45, By: Gfw, IP: [22.214.171.124]
L4: Is a Stub Year allowed?I agree with your initial assessment that you may be over-thinking this. On the other hand, it pays to be careful when making such important decisions. Perhaps some degree of compromise is in order. Using the resources available on this web site is a great start and you are doing that.> In fact, informal consultation with the IRS has resulted in the expressed opinion that payment of a full > twelve months distribution amount in a short first year would be a clear violation of the substantially > equal periodic paymentsÛ requirement for the fixed amortization and fixed annuitization methods.I am sure that the consensus of those who frequent this web site is that not all IRS agents are familiar with the intricacies of section 72(t). The fact is well established that the IRS allows us to choose between taking a full year SEPP payment in our 1st year or the prorated amount per month. Many successful SEPPs have been created usingboth of these methods. Additionally, if a full year of payments is taken, even in December, then there is no short year. It is a full year, no matter when during the year the distribution is made. The IRS does not track the frequency of SEPP distributions… only the annual amount distributed because that appears on form 1099-R.I started my SEPP in March 2005 and reached age 59.5 last February. When I started my SEPP, I was concerned about the amount I was taking in the 1st year, so avoided the stub year by taking quarterly payments. Since March is in the 1st quarter of the year, I received all 4 quarterly payments for 2005 which eliminated the stub year. Had I opted to take 10/12ths of the 2005 payment, that would have been acceptable but would also have added a complication that I did not see any reason to add. In the SEPP world, simpler is almost always better. Adding complications is fine but only if there is a good reason to do so. Since you are considering a SEPP that starts near the middle of the year, it could make sense for you not to distributea full year of payments to cover 1/2 a year of expenses.2009-12-02 17:25, By: Ed_B, IP: [126.96.36.199]
L2: Is a Stub Year allowed?I began a withdrawal of $1525 a month in September 2004 at age 54 In 2004 I took 4 payments in a stub year, $6100 (SEPP) set up by Fidelity.2005 – $18,3002006 – $18,3002007 – $18.3002008 = $18300I was audited by the IRS in 2008.I sent a simple 1 page letter of how I set up my Sepp plan, done with Fidelity “retirement specialists.” The IRS said what I did was fine and my case is closed.So yes a first year stub is OK and a last year stub is OK also although I intend to take $18,300 out of my IRA in 2010 when I reach 59.5 just to be sure.By the way, I got no help from Fidelity. They said not our problem, you chose the figures, good luck. The paperwork wasnot in my handwriting; all done by a retirement specialist.Every year I received a letter from Fidelity advising me it would be wise to contribute to my IRA. If I did, I would have busted the SEPP. NO aditions are allowed. Not one dollar. As soon as 2010 is over I’m leaving Fidelity, they gave me a lot of bad advice and little help.****JUST TO CLARIFY, I rec’d my first monthly payment of $1525 on 9/1/04 and turned 54 on 9/16/04. I will be 59.5 on 3/16/2010. However just to be safe and because my plan works so well for me,I’m continuing to take out 1525 a month for all of 2010, in fact up until I reach 62 and start getting social security. But I am leaving Fidelity.2010-02-11 08:04, By: tom palm springs, IP: [188.8.131.52]
L3: Is a Stub Year allowed?Tom… thanks for sharing your experiences.For years we have been trying to tell people that they are responsible for theirown plan – your post merely reconfirms. 2010-02-11 11:49, By: Gfw, IP: [184.108.40.206]
L4: Is a Stub Year allowed?>>>I intend to take $18,300 out of my IRA in 2010WHEN I reach 59.5 just to be sure. <<