Overview
Main Menu Name: Pre-59½
Calculates two of the three allowable methods for computing the substantially equal payments needed to avoid the 10% early distributions penalty. The 10% "early distribution" penalty applies to lump sum distributions, deemed distributions, and both voluntary and involuntary cashouts (unless the amount of the cashout is rolled over to another qualified plan or IRA). The IRS states that the money must be taken out in "substantially equal periodic payments." These payments are made not less than annually.
The penalty Does Not apply to the following distributions:
- Distributions made after age 59½
- Distributions made to the beneficiary of the plan or their estate on or after the participant's death
- Distributions made because of the permanent disability of the participant
- Distributions made after separation from service after age 55 (this does not apply to IRAs)
- Distributions made to a former spouse, child, or other dependent of the participant if made under a QDRO-Qualified Domestic Relations Order-(does not apply to IRAs)
- Distributions made to the extent of medical expenses whether or not they were actually deducted (does not apply to IRAs)
In this article:
Background
This calculation determines the amount of money that can be taken out of a retirement plan or IRA before age 59½ without incurring the 10% penalty on those distributions.
The 10% "distribution" penalty applies to lump sum distributions, deemed distributions, and both voluntary and involuntary cashouts (unless the amount of the cashout is rolled over to another qualified plan or IRA).
The IRS states that the money must be taken out in "substantially equal periodic payments." These payments are made not less than annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and beneficiary.
The penalty does not apply to the following distributions:
- Distributions made after age 59½
- Distributions made to the beneficiary of the plan or their estate on or after the participant's death
- Distributions made because of the permanent disability of the participant
- Distributions made after separation from service after age 55 (this does not apply to IRAs)
- Distributions made to a former spouse, child, or other dependent of the participant if made under a QDRO-Qualified Domestic Relations Order - (does not apply to IRAs)
- Distributions made to the extent of medical expenses whether or not they were actually deducted (does not apply to IRAs)
There are three methods by which to calculate these distributions: Minimum Distributions, Amortization, and Annuity Factor. This program computes the two latter methods.
The Amortization Method allows the amount that is distributed annually to be calculated by amortizing the employee's account balance over a number of years equal to the life expectancy of the account owner or the joint life expectancies of the account owner and beneficiary. Life expectancies are to be determined in accordance with IRS regulations with an interest rate beginning on the date the payments commence that does not exceed a reasonable interest rate.
The Annuity Factor Method determines the amount that is distributed annually by dividing the retirement owner's account balance by an annuity factor which is derived by using an appropriate mortality table and a reasonable interest rate.
Getting Started
There are three methods by which to calculate these distributions: Minimum Distributions, Amortization, and Annuity Factor. The software illustrates the Amortization and Annuity Factor methods to calculate early distributions.
The Amortization Method allows the amount that is distributed annually to be calculated by amortizing the employee's account balance over a number of years equal to the life expectancy of the account owner or the joint life expectancies of the account owner and beneficiary. Life expectancies are to be determined in accordance with IRS regulations proposed section 1.401(a)(9)-1 with an interest rate beginning on the date the payments commence that does not exceed a reasonable interest rate.
The Annuity Method determines the amount that is distributed annually by dividing the pension owner's account balance by an annuity factor which is derived by using a reasonable mortality table and a reasonable interest rate.
Entering Data
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First Distribution Date: Enter the month and year of the first distribution.
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Retirement Fund Balance: Enter the value of all assets in the plan.
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Owner's Age: Enter the age of the current owner of the pension fund on his or birthday during the tax year in which the payments begin.
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Beneficiary: Choose whether to use a beneficiary or not.
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Beneficiary's Age: Enter the age of the beneficiary. If you do not choose to use a beneficiary, this entry field will not appear.
2003 and later:
Use Uniform Table for Amortization
Before 2003:
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Reasonable Interest Rate: Enter an interest rate to be used with the Amortization and Annuity Factor methods of calculating the distribution. In some cases, the IRS has accepted the use of the Annual Long-Term 120% Applicable Federal Rate (AFR) for the month in which distributions begin. This rate changes monthly and is reported in the Wall Street Journal (see Federal Interest Rates in the Money and Investing section, generally between the 18th and 23rd of the preceding month).
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Annuity Factor Table: When calculating an annuity factor for the Annuity method, the program requires you to select a mortality table. The program offers the 80CNSMT (1980 table from IRS publication 1457), the §1.72 (1983 table listed in IRS Regulations §1.72-7(c)(1)(iii)), the UP-1984 Table, the 90CM table, and the 2000CM table. The example in IRS Notice 89-25, 1989-1 C.B. 662 uses the UP-1984 Mortality Table. As of May 1,1999, the IRS released the 90CM mortality table. This table replaces the older 80CNSMT. Between May 1, 1999 and June 30, 1999, you can use either the 80CNSMT or the 90CM Table. After June 30, 1999, do not use the 80CNSMT (T.D. 8819; REG-103851-99). Note: Brentmark has permission to use the UP-1984 Table. Copyright © 1976 Conference of Consulting Actuaries, All Rights Reserved.
- Distribute at Beginning of Year: Choose yes if the distribution is at the beginning of the year.
Results
Amortization Method
Shows the calculated life expectancy of the pension fund owner and the amount of money that needs to be distributed annually in order to avoid the 10% tax penalty.
Annuity Method
Shows the annuity factor ("the present value of an annuity of $1 per year beginning at the taxpayer's age attained in the first distribution year and continuing for the life expectancy of the taxpayer") for the pension fund owner and the amount of money that needs to be distributed annually to avoid the 10% tax penalty.
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