Pre-59½ Distributions Information

[Kathleen Reynolds]

#3315

Distributions made before age 59½ are generally subject to a 10% additional income tax, although there are exceptions available in many cases. In order to take money out of a qualified plan or IRA before age 59½ without incurring a 10% penalty, a plan owner must make what the IRS calls “substantially equal periodic payments.” There are three methods for calculating these payments: Minimum Distributions method, Amortization, and Annuitization. The program asks for information to calculate all three distribution methods, so that it can do a comparison of them.

For 2003 through 2021, you can select whether to use the calculations described in Rev. Rul. 2002-62 or the revisions put forth in the Rev. Rul. 2002-62 FAQ. The FAQ (Frequently Asked Questions list) was published by the IRS on their web site after the Revenue Ruling. Using its methodology results usually results in higher distribution amounts. For 2002 and earlier, the rules of IRS Notice 89-25 apply.

For 2022 and later, the IRS Notice 2022-6 has not ruled on if you can use the FAQ calculation from the Rev. Rul. 2002-62. The program will still allow for you to select to use it or not, until such a ruling has been published.

When you click the Use Pre-59½ Distributions check box, these distributions override any other distributions that might occur during the same five-year period as the pre-59½ distributions.

Pre-59½ distributions have to last until the plan owner reaches age 59½, with the additional requirement that they must run for at least 5 years. Usually, this results in distributions being made for a portion of the year that the owner reaches age 59½. For example, if distributions are being taken quarterly, and the plan owner turns age 59½ in February 2010, only the first distribution has to be in 2010. If distributions occur at the end of each quarter, no distributions would have to be made in 2010 (assuming that five years worth of distributions have already been taken).

The pre-59½ distribution reports are displayed on the right side of the window. Whichever one is currently showing will be automatically selected when you click the Print button. See the Print Report Window for more details.

When a Distribution Desired is entered (which may be an Annual, Semiannual, Quarterly or Monthly amount), the plan balance necessary to meet that goal is calculated and appears on the printed reports. The distribution method used is selected to use the smallest account balance necessary to produce the desired distributions. This can help determine the plan amount to segregate for early distributions. The Calculation Method used is the method chosen in the inputs (Rev. Rul. 2002-62 FAQ or Rev. Rul. 2002-62).

Program Hint: When using the Distribution Desired feature, it is helpful to click on the Date tab (which is immediately right of the Comparison tab). You will see changes to the report as you make changes to inputs such as the Distribution Desired or Calculation Method.

For discussion on Calculation Method see Private Letter Rulings

Converting Existing Pre-59½ Distributions: Revenue Ruling 2002-62 allows for a one-time switch to the Minimum Distributions method of calculating pre-59½ distributions. The software allows you to illustrate this switch. Enter the date the client started taking distributions as the Starting Date and the year of the switch as the Distribution Year. Select Switch: Min. Dist. as the Distribution Method. The illustration will start in Distribution Year, illustrating the Minimum Distributions method from that year through the end of the calculations.

Maximum Interest Rate: IRS Notice 2022-6 defines the maximum “interest rate” to be the greater of 5% and the highest applicable federal midterm rate of the two months prior to the first distribution. Answering yes to this question causes the program to fill in the “reasonable interest rate” automatically, disabling that input field. If no federal midterm rate has been entered, the program displays a message and the “Use Maximum Interest Rate” input is set to “No.”

Rev. Rul. 2002-62 defines the maximum “reasonable interest rate” to be the highest applicable federal midterm rate of the two months prior to the first distribution. Answering yes to this question causes the program to fill in the “reasonable interest rate” automatically, disabling that input field. If no federal midterm rate has been entered, the program displays a message and the “Use Maximum Interest Rate” input is set to “No.”

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