Rev. Rul. 2002-62 2.02(d) Account Balance

L1: Rev. Rul. 2002-62 2.02(d) Account BalanceWhen discussing how to determine the account balance for 72(t) distributions, Rev. Rul. 2002-62 says, “For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on December 31 of the prior year or on a date within a reasonable period before that year’s distribution.” Does this mean you can change the date the balance is determined from year-to-year, or once it’s established do you have to use the same date each year?
I started my SEPP plan on Nov 23, 2009 using the RMD method. I used the account balance as of Sep 30, 2009 to determine my 2009 distribution, and I took the full annual distribution on Nov 23. In 2010, I used the account balance as of Dec 31, 2009 to determine my 2010 distribution and I took quarterly payments on Feb 1, May 1, Aug 1, and Nov 1. For 2011 and future years, I plan on taking quarterly payments on the same schedule. My question is, for 2011 (or any future year), can I use any account balance from Dec 31 of the prior year through Feb 1 of that year to determine that year’s annual distribution? And can I change that date each year? Specifically for 2011, I might want to use the account balance in early January to determine the 2011 distribution, rather than Dec 31, 2010.
If I’m allowed to do that, how do I document the value of my account on any random day? My custodian only produces a statement at the end of the month. I track all of my investments in Quicken. So, I know what the account balance is on any day. Or, I could go to my custodian’s web site and print off the account value on the day I pick.
Any advice would be greatly appreciated.2011-01-04 00:20, By: knupug, IP: [216.139.3.132]

L2: Rev. Rul. 2002-62 2.02(d) Account BalanceThe date to determine the account balance is quite clear in 2002-62 as you quoted, so the issue here is not so much that you would endanger your plan, but that you would have to explain to the IRS why you are using a different date than 12/31. The IRS is not used to seeing this rule applied since almost all RMD method users use the 12/31 date.
And using a balance this is not documented by a month end statement or other hard copy statement just adds another element to be explained. You are also not locked into the quarterly dates you use now, so you could also move to a July semi annual distribution and use the 6/30 date since it will be close to your first distribution for that year. In fact, you could probably delay your first distribution every year hoping to produce a higher account balance on which to base it, but if you do that you still must use a balance date that is quite close to your distribution date.
Another factor to consider is that in explaining this to the IRS, your entire calculation will be scrutinized and since you are doing a new calc every year, you will be operating at a considerable added risk of making an error.
While it is water over the dam at this point, I don’t know why you used the RMD method to begin with. It yields a much lower payment per dollar of account balance, causes you to make a new calc every year, and deprives you of the one time switch to the RMD method and the chance to peel off a separate IRA account for emergency use from the funds you don’t need in the 72t account balance.
In summary,by not using the 12/31 date you aretaking the risk that your balance could drop as well as rise, and I do not see an added benefit of creating added IRS scrutiny unless youknow that the 12/31 balance will not be sufficient and you will have to bust your plan anyway. In that case, it isworth the risk.
2011-01-04 04:36, By: Alan S., IP: [24.119.230.17]

L3: Rev. Rul. 2002-62 2.02(d) Account BalanceWhile it is water over the dam at this point, I don’t know why you used the RMD method to begin with. It yields a much lower payment per dollar of account balance, causes you to make a new calc every year, and deprives you of the one time switch to the RMD method and the chance to peel off a separate IRA account for emergency use from the funds you don’t need in the 72t account balance.
Thanks, Alan. I almost included the above acknowledgement in my post. Unfortunately, when setting up my 72(t), I didn’t consult with someone sufficiently knowlegeable to suggest this approach. And, I didn’t find this site and its wisdom until just a few months ago.
I agree with what you say and plan to use the 12/31 account balance date consistently, just to avoid the additional risks you describe. In fact, if someone really wanted to take a big risk, I wonder if they could argue that the date to determine the account balance need only be “within a reasonable period” of the last payment for any given tax year. The ruling says, “within a reasonable period before that year’s distribution”, and the distribuiton isn’t complete until the final payment. (It doesn’t say “within a reasonable period before that year’s first distribution.”2011-01-04 05:49, By: knupug, IP: [216.139.3.132]

L3: Rev. Rul. 2002-62 2.02(d) Account BalanceWhat follows is a rant that you may or may not want to read. It doesn’t really contribute to the discussion I started in my original post.
I don’t understand how 72(t)(4)(A) is even enforceable. In a plainer form, it says, “If [the 10% penatly] does not apply to a distribution by reason of [a SEPP plan], and the series of payments under [the SEPP Plan] are subsequently modified (other than by reason of death or disability) before [the 59 1/2 and 5-year dates, then the 10% penalty & interest shall be imposed].” 72(t)(4)(A) provides two exceptions under which the paragraph’s penalty does not apply, i.e. death and disability, but no where does it define what constitutes a modification of the series of payments. So, since it’s not encoded in the law, we are left with the IRS and the Tax Court being the arbiters of what constitutes a modfication. That means, someone must take an action, see if they get charged the 10% penalty, and then, through dialog with the IRS, discover the interpretation being applied by the IRS (or ultimately the Tax Court.) Basically, a person cannot know before taking an action and exposing themselves to the 10% penalty, whether their action will result in a 10% penalty. Certainly in the criminal arena and in free speech law, laws that behave in that way have been found to be unconstitutional.
One way to modify the series of SEPP payments, per the IRS, is to modify the account balance. Rev. Rul. 2002-62 2.02(e) provides three cases in which a change to an account balance constitutes a change to the sereis of payments, “Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.” Are all other account balance changes allowed? If so, how strictly does one intepret reason (i)? It uses the word “addition” but then it references “gains or losses.” Arnold v. Commissioner 111 TC No. 12 and Benz v. IRS 132 TC No. 15 seem to hold that additional distributions from an IRA being used for a SEPP invoke the 72(t)(4)(A) surtax unless the distribution qualifies under one of the other 72(t)(2) exceptions (with caveats), see William Stecker’s discussion under Articles of Interest. To me, that all seems very arbitrary. In Arnold, the Tax Court says, “The legislative purpose underlying the section 72(t) tax is that “premature distributions from IRA’s frustrate the intention of saving for retirement, and section 72(t) discourages this from happening.” And in Benz, the Tax Court says, “There is no indication that Congress intended to disallow all additional distributions within the first 5 years of the election to receive periodic payments.” If so, an alternate interpretation that would seem to equally fit the legislature’s intention is that distributions from an IRA under a SEPP, over and above the SEPP payments, are penalized per 72(t)(1) surtax unless one of the 72(t)(2) exceptions apply BUT that an additional distribution (whether penalized or not) does not invoke 72(t)(4)(A) and disqualify the SEPP plan. In other words, the additional distribution is penalized or not based on its own merit but it doesn’t interact with a SEPP plan that continues its calculations per Rev. Rul. 2006-62. That would seem a lot simpler than the mess we currently have.
Of course, then, one would have to wonder, why is 72(t)(4)(A) in the section at all? What purpose does it serve? Enough.2011-01-04 07:08, By: knupug, IP: [216.139.3.132]