PLR ruling 2004-32021

L1: PLR ruling 2004-32021If I understand PLR 2004-32021 correctly, one can change an existing 72t SEPP withdrawal method from a fixed amortization to an annually recalculated amortization method even if you have been in the fixed plan for a few years.
I would have thought that youwould haveto decide up front when first setting up a 72t SEPP whether to go fixed or recalculate each year but this ruling seems to allow a switch at any time. Am I understanding this correctly?
2004-32021 (May 11, 2004) In the Fall of 2003, Taxpayers A & B commenced their respective SEPP plans using the amortization method and taking a full year”s distribution in 2003. Then, both taxpayers filed for this ruling requesting annual recalculation as of each December 31st going forward until each had separately attained the age of 59 _. In each case, their respective account balances would be revalued as of December 31st, each would use 120% of the mid-term applicable federal rate as of December, each would use an updated single life expectancy based on their respective ages for the forthcoming year. Based on these updated values, each would compute a new amortization based annual distribution for the forthcoming year and distribute same. This process would further be repeated each and every year going forward. The IRS ruled affirmatively using some interesting language: “taxpayer A and taxpayer B propose to determine the annual payments from their respective IRAs using the fixed amortization method as described in Revenue Ruling 2002-62, except that rather than making a fixed annual payment, taxpayer A and taxpayer B propose to recalculate the amount of the annual payment from their respective IRAs each year.2006-07-30 08:12, By: JLDunn, IP: [66.82.9.74]

L2: PLR ruling 2004-32021I think you are reading something into the PLR that doesn”t really exist. While the actual application date was unknown, the PLR would propbably have been applied for (based on the issue date) in 2003, before the end of the first year. It is also very likely that the initial plan was designed with annual recalculation subject to the IRS issuing a favorablePLR.
I totally agree with your observation that… “youwould haveto decide up front when first setting up a 72t SEPP whether to go fixed or recalculate each year”. Which is very like wwhat they did.
Maybe Bill will offer his comments.2006-07-30 10:53, By: Gfw, IP: [172.16.1.72]

L2: PLR ruling 2004-32021You are probably right. It just looked like they had already started taking distributions based on the fixed amortization method in 2003 and then changed to annual recalculations after the PLR ruling in 2004. In other words they were allowed to change after already setting the 72t up so possibly others could do so as well.2006-07-30 11:22, By: JLDunn, IP: [66.82.9.49]

L2: PLR ruling 2004-32021Hello JL:
Actually, I am intimately familar with this PLR as I submitted it to the IRS for the clients. As usual there is alot missing from a published PLR in comparision to the originally submitted request; in this case 30 – 40 pages of material; at least some of which should have been published in order to make the ruling clearer.
In this this case, the taxpayers took their 1st distributions in Aug or Sep 2003 and quickly filed the PLR request to obtain permission to annually recalculate beginning 1/1/04. Thus, there was no lapse of time or multiple of years as you suggest.
TheBadger
wjstecker@wispertel.net
2006-07-30 19:21, By: TheBadger, IP: [66.109.211.254]

L2: PLR ruling 2004-32021I think the amortization and annuitization methods were referred to as “fixed” pursuant to 89-25. The recent PLRs approving recalculation effectively remove reference to “fixed” from those two methods. What is fixed is the intent to recalculate or not, which in spiritshould bedone with the first calculation.
However, since the IRS does not require up front documentation of the assumptions used and since the first year payment is the same either way, a window opens up during that first year to decide to recalculate or not. In the above PLR the IRS approved recalculation after the first payment had been taken without any such intent. When the second year calculation is completed, however, you are either locked into recalculating every year (updating all three variables) or sticking with thefirst year payment which then becomes permanently fixed, the exception being the one time option to change to RMD. Accordingly, recalculation cannot be adopted any time in the plan.
And if your custodian is to code your 1099R with a 2, there is a good chance that opportunity will disappear with many of them if you make the recalculation decision during that first year “window” rather than up front on the initial documentation if they request it.
2006-07-30 20:10, By: Alan S., IP: [24.116.165.157]

L2: PLR ruling 2004-32021Thanks Badger and Alan for your input. I think I understand now what is going on.
Hopefully someone will get a PLR to allow existing 72t”s to use this method someday. Allowing folks to change to an annualrecalculation method seems to preserve the intent of the SEPP and would give us more flexibility.
Things change and interest rates and investments rise and fall. The ability to modify withdrawals with the latest information would seem to make these accounts more securein the long run and less likely to run out of funds too early.
2006-07-30 22:47, By: JLDunn, IP: [66.82.9.92]

L2: PLR ruling 2004-32021Granted, that would provide greater flexibility for those skilled at using more options, but it would also add more complexity and expose more taxpayers to the risk of busting their SEPPS by making a critical error. And this is already an area that has a huge knowledge gap relative to what can be done, and a technical gap in that the average taxpayer often has problems getting the professional assistance they need to safely navigate the rules.
Now that PLRs cost so much as well, there may well be less guidance coming out of the IRS on this subject, leaving taxpayers to gamble somewhat by depending on prior PLRs that are not legally binding for future use. When you depend on a PLR, you hope your circumstances are nearly identical to those of the original applicant.
2006-07-30 23:39, By: Alan S., IP: [24.116.165.157]