Mid year changes?

L1: Mid year changes?I have heard conflicting information on the following:
How does a taxpayer who is currently taking monthly 72t distributions perform a mid-year method change from the amortization or annuity method to the RMD method? For example,a retiree started 72t distributions at $2,000 per month in June of 2000, and now switches to RMD with an estimated $563 per month (based on their 12-31-02 balance). If the change/reduction is made mid-year, wouldthe IRS be okay with the first part of thecalender year being under the old rules and the last part of the year under the new rules? Or, would the IRS say the retiree took out “too much” that year (since the amount taken out of the IRA in that calender year would exceed the RMD amount)?2003-01-27 23:21, By: Burk, IP: [127.0.0.1]

L2: Mid year changes?Hello Burk:
There are two tests to be met in order to switch to the RMD method:
(1) Another method must have been used in a prior year.
(2) The other method must have been the amortization or annuitization method.
Given passage of these tests, how does one switch, particularly a mid-year switch. In this regard there are two schools of thought:
(1) The ruling says in part: “may in any subsequent year switch to the RMD method to determine the payment for the year of the switch and all subsequent years…”. This language would suggest that irrespective of when during the year you might switch, you would use the RMD mehtod to compute the distribution for the whole year. However, the ruling does not say “whole year”; it just says “the year”.
(2) Section 3 of the ruling says: “is permitted to be changed at any time to the RMD method…”. This would suggest that the taxpayer can pick any date to switch but provides no specific tactical guidance as to how to accomplish the switch. The most common thought is to do a mid-year “pro-rata” switch; e.g. in your case, taking $2000 per month for months 1-6, revalue @ 6/30/xx and then presumeably take $563 per month for months 7-12.
Which is the correct interpretation? The Service refuses to answer the question directly when asked but they are willing to rule on a private letter ruling. I am personally in camp #2. It is extremely rare for a public revenue ruling to use the language “at any time”. To then rule adversely and say “you can change at any time [during the year]…as long as the sum of the distributions for the year of the change do not exceed the RMD method for the whole year” would be very restrictive; and certainly a bit two-faced; third, embarasssing; fourth, counter-productive.
Remember that the Service had as much time as they reasonably wanted to say what they wanted to say. Now they have spoken. Unfortunately the ruling is law but was drafted by humans and sometimes humans err or at least don”t say everything they meant to say.
The right answer is gray; you can choose to err on the side of caution or on the side of aggressiveness.
TheBadger
wjstecker@wispertel.net

2003-01-28 10:42, By: TheBadger, IP: [127.0.0.1]