Removals from Separate IRAs Prior to 59½ Without 10% Tax
Generally, withdrawals from an IRA prior to age 59-½ are subject to a 10%, nondeductible excise tax. Under one of the Code exceptions, withdrawals can be structured to escape this additional tax. IRS Notice 89-25 and a number of private letter rulings detail acceptable methods for structuring these distributions.
A recent private letter ruling indicates that the IRS may be willing to allow a taxpayer to calculate the pre-age 59-½ election (assuming an appropriate method is used) for each IRA separately, and then take the distribution from one or a combination of all the taxpayer's IRAs. In PLR 9505022, a taxpayer maintained eight IRAs and started receiving monthly distributions at age 55. The taxpayer calculated the monthly distribution from each IRA separately using the taxpayers life expectancy as determined in 1994. The method of calculation used by the taxpayer was an acceptable method for meeting the pre-age 59-½ penalty tax exception. The taxpayer then wanted to withdraw the full amount payable each month from one of the IRAs in accordance with the alternative method provided in IRS notice 88-38. This Notice allows a taxpayer to satisfy the age 70-½ minimum distribution rules by taking from one IRA the amount required to satisfy the minimum distribution requirement for all other IRAs.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
After review, the IRS ruled that the monthly distributions constitute a series of substantially equal periodic payments made for a period equal to the taxpayers life expectancy. As such, the distributions were structured in such a manner that they are not subject to a 10% excise tax.
This ruling, if applied on a larger scale, would permit taxpayers more flexibility in retirement planning because they may choose to take distributions from the IRAs providing a lesser rate of return and thus allow funds to stay in those accounts providing a better rate of return.
Note: IRS private letter rulings may only be relied upon by the taxpayer to which the ruling is issued. Private letter rulings should not be relied upon as precedent. They are, however, a good indication of the IRS's current position on specific tax issues.
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