RDL: SEPP Distributions

[Kathleen Reynolds]

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Illustrations for individuals seeking a penalty free income stream from their IRA prior to age 59½ under IRC 72(t) or 72(q).

 

Plan Profile

• Start date The date in which the distribution should begin. When the Distribution Frequency is other than annual, the Start Date determines the date of the first pre-59½ distribution.
• Starting balance The initial plan balance, which can be selected from any of the daily valuations from December 31 of the preceding year until the day of your first distribution. For annuity values, use the entire interest value if it is different from the fair market value. For minimum distribution method illustrations, you must use the previous year end value.
• Expected plan growth The growth rate that you’d like to use to estimate how the plan will grow in future years.
• IRA owner’s date of birth This impacts both the amount of the distributions and the amount of time the distributions have to be taken. Younger IRA owners will have smaller distribution amounts because of their longer life expectancies and the distributions will have to be taken for a longer period of time (5 years or age 59½, whichever is longer).
• Distribution frequency Select based on how often the client would like to receive payments.
• Distribution desired Enter the dollar amount of the periodic payment the client wishes to receive. The program will calculate the balance necessary to generate the desired payment.

Options

• Distribution method When using the Pre-59½ Distributions calculator, there are three methods for calculating these “Substantially Equal Periodic Payments” (SEPPs): Required Minimum Distributions Method, Amortization Method, and Annuity Factor Method. The Distribution Method determines the results of the Pre-59½ Distributions report. All calculations are based on the life expectancy tables published and updated by the IRS.
• Definition of calculation methods
  • • The Required Minimum Distribution (RMD) payment is calculated by dividing the account balance of your IRA/non-qualified annuity you enter by your life expectancy or the joint life expectancies of you and your beneficiary. Please note that when using the RMD method, payments must be recalculated each year. Distribution amounts will vary with the account balance, actual annuity/IRA growth rate and other assumptions.
    • The Amortization payment is calculated by amortizing the balance in your IRA/non-qualified annuity (as of the starting date specified) over a number of years equal to your life expectancy or the joint life expectancies of you and your beneficiary, at the interest rate specified on the date the payments begin. The life expectancy(ies) is/are derived from the Single Life table unless you elect the Joint or Uniform Life Table. The interest rate used for the Amortization method will not exceed the greater of 5% or 120% of the federal mid-term rate for either of the two months immediately preceding the date on which the payments begin.
    • The Annuity Factor payment is calculated by dividing the balance in your IRA/non-qualified annuity (as of the starting date specified), by a life annuity factor. The annuity factor is derived from the Single Life Table unless you elect to use another table. The interest yield used for the Annuity Factor method will not exceed the greater of 5% or 120% of the federal mid-term rate for either of the two months immediately preceding the date on which the payments begin.
• Life expectancy Select the life expectancy desired. Choosing “Single” will result in the highest payout because it is the shortest life expectancy option. There are no implications to the life expectancy method chosen other than the amount of the payout.
• Beneficiary’s date of birth The date of birth for the beneficiary of the IRA Owner. Only input if you are using joint life expectancy.
• Interest rate Pursuant to IRS Notice 2022-6, the interest rate used can not exceed the greater of 5% or 120% mid-term rate for either of the two months preceding the date of the distribution. The maximum allowable rate will be used by the program to calculate your SEPPs unless you input a lower rate.

General Screen Functions
See Notice 2022-6

 

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