Tax Notes logo

IRS To Allow Onetime Change In IRA Periodic Payment Schedule.

OCT. 3, 2002

Rev. Rul. 2002-62; 2002-2 C.B. 710

DATED OCT. 3, 2002
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference
    For a summary of Notice 89-25, 1989-1 C.B. 662, see Tax Notes, March

    27, 1989, p. 1578; for the full text, see 89 TNT 62-16 or H&D Mar.

    20, 1989, p. 2796.

    Part I

    Section 72. -- Annuities; Certain Proceeds of Endowment and Life

    Insurance Contracts
  • Code Sections
  • Subject Areas/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-22476 (8 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 193-7
Citations: Rev. Rul. 2002-62; 2002-2 C.B. 710

Modified and Superseded by Notice 2022-6

Rev. Rul. 2002-62

SECTION 1. PURPOSE AND BACKGROUND

.01 The purpose of this revenue ruling is to modify the provisions of Q&A-12 of Notice 89-25, 1989-1 C.B. 662, which provides guidance on what constitutes a series of substantially equal periodic payments within the meaning of § 72(t)(2)(A)(iv) of the Internal Revenue Code from an individual account under a qualified retirement plan. Section 72(t) provides for an additional income tax on early withdrawals from qualified retirement plans (as defined in § 4974(c)). Section 4974(c) provides, in part, that the term "qualified retirement plan" means (1) a plan described in § 401 (including a trust exempt from tax under § 501(a)), (2) an annuity plan described in § 403(a), (3) a tax-sheltered annuity arrangement described in § 403(b), (4) an individual retirement account described in § 408(a), or (5) an individual retirement annuity described in § 408(b).

.02 (a) Section 72(t)(1) provides that if an employee or IRA owner receives any amount from a qualified retirement plan before attaining age 59 1/2, the employee's or IRA owner's income tax is increased by an amount equal to 10-percent of the amount that is includible in the gross income unless one of the exceptions in § 72(t)(2) applies.

(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in § 72(t)(1) will not be applicable. Pursuant to § 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception.

(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59 1/2, the exception to the 10- percent tax does not apply, and the taxpayer's tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.

(d) Q&A-12 of Notice 89-25 sets forth three methods for determining whether payments to individuals from their IRAs or, if they have separated from service, from their qualified retirement plans constitute a series of substantially equal periodic payments for purposes of § 72(t)(2)(A)(iv).

(e) Final Income Tax Regulations that were published in the April 17, 2002, issue of the Federal Register under § 401(a)(9) provide new life expectancy tables for determining required minimum distributions.

SECTION 2. METHODS

.01 General rule. Payments are considered to be substantially equal periodic payments within the meaning of § 72(t)(2)(A)(iv) if they are made in accordance with one of the three calculations described in paragraphs (a) - (c) of this subsection (which is comprised of the three methods described in Q&A-12 of Notice 89-25).

(a) The required minimum distribution method. The annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year. If this method is chosen, there will not be deemed to be a modification in the series of substantially equal periodic payments, even if the amount of payments changes from year to year, provided there is not a change to another method of determining the payments.

(b) The fixed amortization method. The annual payment for each year is determined by amortizing in level amounts the account balance over a specified number of years determined using the chosen life expectancy table and the chosen interest rate. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

(c) The fixed annuitization method. The annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the taxpayer's age and continuing for the life of the taxpayer (or the joint lives of the individual and beneficiary). The annuity factor is derived using the mortality table in Appendix B and using the chosen interest rate. Under this method, the account balance, the annuity factor, the chosen interest rate and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

.02 Other rules. The following rules apply for purposes of this section.

(a) Life expectancy tables. The life expectancy tables that can be used to determine distribution periods are: (1) the uniform lifetime table in Appendix A, or (2) the single life expectancy table in § 1.401(a)(9)-9, Q&A-1 of the Income Tax Regulations or (3) the joint and last survivor table in § 1.401(a)(9)-9, Q&A-3. The number that is used for a distribution year is the number shown from the table for the employee's (or IRA owner's) age on his or her birthday in that year. If the joint and survivor table is being used, the age of the beneficiary on the beneficiary's birthday in the year is also used. In the case of the required minimum distribution method, the same life expectancy table that is used for the first distribution year must be used in each following year. Thus, if the taxpayer uses the single life expectancy table for the required minimum distribution method in the first distribution year, the same table must be used in subsequent distribution years.

(b) Beneficiary under joint tables. If the joint life and last survivor table in §1.401(a)(9)-9, Q&A-3, is used, the survivor must be the actual beneficiary of the employee with respect to the account for the year of the distribution. If there is more than one beneficiary, the identity and age of the beneficiary used for purposes of each of the methods described in section 2.01 are determined under the rules for determining the designated beneficiary for purposes of § 401(a)(9). The beneficiary is determined for a year as of January 1 of the year, without regard to changes in the beneficiary in that year or beneficiary determinations in prior years. For example, if a taxpayer starts distributions from an IRA in 2003 at age 50 and a 25-year-old and 55-year-old are beneficiaries on January 1, the 55-year-old is the designated beneficiary and the number for the taxpayer from the joint and last survivor tables (age 50 and age 55) would be 38.3, even though later in 2003 the 55-year- old is eliminated as a beneficiary. However, if that beneficiary is eliminated or dies in 2003, under the required minimum distribution method, that individual would not be taken into account in future years. If, in any year there is no beneficiary, the single life expectancy table is used for that year.

(c) Interest rates. The interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate (determined in accordance with § 1274(d) for either of the two months immediately preceding the month in which the distribution begins). The revenue rulings that contain the § 1274(d) federal mid-term rates may be found at www.irs.gov\tax_regs\fedrates.html.

(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on the December 31 of the prior year or on a date within a reasonable period before that year's distribution.

(e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. 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.

.03 Special rules. The special rules described below may be applicable.

(a) Complete depletion of assets. If, as a result of following an acceptable method of determining substantially equal periodic payments, an individual's assets in an individual account plan or an IRA are exhausted, the individual will not be subject to additional income tax under § 72(t)(1) as a result of not receiving substantially equal periodic payments and the resulting cessation of payments will not be treated as a modification of the series of payments.

(b) One-time change to required minimum distribution method. An individual who begins distributions in a year using either the fixed amortization method or the fixed annuitization method may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years and the change in method will not be treated as a modification within the meaning of § 72(t)(4). Once a change is made under this paragraph, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be a modification for purposes of § 72(t)(4).

SECTION 3. EFFECTIVE DATE AND TRANSITIONAL RULES

The guidance in this revenue ruling replaces the guidance in Q&A-12 of Notice 89-25 for any series of payments commencing on or after January 1, 2003, and may be used for distributions commencing in 2002. If a series of payments commenced in a year prior to 2003 that satisfied § 72(t)(2)(A)(iv), the method of calculating the payments in the series is permitted to be changed at any time to the required minimum distribution method described in section 2.01(a) of this guidance, including use of a different life expectancy table.

SECTION 4. EFFECT ON OTHER DOCUMENTS

Q&A-12 of Notice 89-25 is modified.

SECTION 5. REQUEST FOR COMMENTS

The Service and Treasury invite comments with respect to the guidance provided in this revenue ruling. Comments should reference Rev. Rul. 2002-62.

Comments may be submitted to CC:ITA:RU (Rev. Rul. 2002-62, room 5226, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8:30 a.m. and 5 p.m. Monday to Friday to: CC:ITA:RU (Rev. Rul. 2002-62), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, D.C. Alternatively, comments may be submitted via the Internet at Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.

Drafting Information

The principal author of this revenue ruling is Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact Mr. Rubin at 1-202-283-9888 (not a toll-free number).

 

Appendix A

 

Uniform Lifetime Table

 

 

 _________________________________________________________________________

 

 Taxpayer's Age     Life Expectancy     Taxpayer's Age     Life Expectancy

 

 _________________________________________________________________________

 

       10                86.2                 63                33.9

 

       11                85.2                 64                33.0

 

       12                84.2                 65                32.0

 

       13                83.2                 66                31.1

 

       14                82.2                 67                30.2

 

       15                81.2                 68                29.2

 

       16                80.2                 69                28.3

 

       17                79.2                 70                27.4

 

       18                78.2                 71                26.5

 

       19                77.3                 72                25.6

 

       20                76.3                 73                24.7

 

       21                75.3                 74                23.8

 

       22                74.3                 75                22.9

 

       23                73.3                 76                22.0

 

       24                72.3                 77                21.2

 

       25                71.3                 78                20.3

 

       26                70.3                 79                19.5

 

       27                69.3                 80                18.7

 

       28                68.3                 81                17.9

 

       29                67.3                 82                17.1

 

       30                66.3                 83                16.3

 

       31                65.3                 84                15.5

 

       32                64.3                 85                14.8

 

       33                63.3                 86                14.1

 

       34                62.3                 87                13.4

 

       35                61.4                 88                12.7

 

       36                60.4                 89                12.0

 

       37                59.4                 90                11.4

 

       38                58.4                 91                10.8

 

       39                57.4                 92                10.2

 

       40                56.4                 93                 9.6

 

       41                55.4                 94                 9.1

 

       42                54.4                 95                 8.6

 

       43                53.4                 96                 8.1

 

       44                52.4                 97                 7.6

 

       45                51.5                 98                 7.1

 

       46                50.5                 99                 6.7

 

       47                49.5                 100                6.3

 

       48                48.5                 101                5.9

 

       49                47.5                 102                5.5

 

       50                46.5                 103                5.2

 

       51                45.5                 104                4.9

 

       52                44.6                 105                4.5

 

       53                43.6                 106                4.2

 

       54                42.6                 107                3.9

 

       55                41.6                 108                3.7

 

       56                40.7                 109                3.4

 

       57                39.7                 110                3.1

 

       58                38.7                 111                2.9

 

       59                37.8                 112                2.6

 

       60                36.8                 113                2.4

 

       61                35.8                 114                2.1

 

       62                34.9                 115                1.9

 

 _________________________________________________________________________

 

Appendix B

 

 

Mortality Table Used to Formulate the Single Life Table in

 

§ 1.401(a)(9)-9, Q&A-1

 

 

      _______________________________________________

 

           age            qx              lx

 

      _______________________________________________

 

             0         0.001982        1000000

 

             1         0.000802         998018

 

             2         0.000433         997218

 

             3         0.000337         996786

 

             4         0.000284         996450

 

             5         0.000248         996167

 

             6         0.000221         995920

 

             7         0.000201         995700

 

             8         0.000222         995500

 

             9         0.000241         995279

 

            10         0.000259         995039

 

            11         0.000277         994781

 

            12         0.000292         994505

 

            13         0.000306         994215

 

            14         0.000318         993911

 

            15         0.000331         993595

 

            16         0.000344         993266

 

            17         0.000359         992924

 

            18         0.000375         992568

 

            19         0.000392         992196

 

            20         0.000411         991807

 

            21         0.000432         991399

 

            22         0.000454         990971

 

            23         0.000476         990521

 

            24         0.000501         990050

 

            25         0.000524         989554

 

            26         0.000547         989035

 

            27         0.000567         988494

 

            28         0.000584         987934

 

            29         0.000598         987357

 

            30         0.000608         986767

 

            31         0.000615         986167

 

            32         0.000619         985561

 

            33         0.000622         984951

 

            34         0.000625         984338

 

            35         0.000629         983723

 

            36         0.000636         983104

 

            37         0.000657         982479

 

            38         0.000696         981834

 

            39         0.000749         981151

 

            40         0.000818         980416

 

            41         0.000904         979614

 

            42         0.001007         978728

 

            43         0.00113          977742

 

            44         0.00127          976637

 

            45         0.001426         975397

 

            46         0.001597         974006

 

            47         0.001783         972451

 

            48         0.001979         970717

 

            49         0.002187         968796

 

            50         0.002409         966677

 

            51         0.002646         964348

 

            52         0.002896         961796

 

            53         0.003167         959011

 

            54         0.003453         955974

 

            55         0.003754         952673

 

            56         0.004069         949097

 

            57         0.004398         945235

 

            58         0.004736         941078

 

            59         0.005101         936621

 

            60         0.005509         931843

 

            61         0.005975         926709

 

            62         0.006512         921172

 

            63         0.007137         915173

 

            64         0.007854         908641

 

            65         0.008670         901505

 

            66         0.009591         893689

 

            67         0.010620         885118

 

            68         0.011778         875718

 

            69         0.013072         865404

 

            70         0.014519         854091

 

            71         0.016139         841690

 

            72         0.017950         828106

 

            73         0.019958         813241

 

            74         0.022198         797010

 

            75         0.024699         779318

 

            76         0.027484         760070

 

            77         0.030582         739180

 

            78         0.034010         716574

 

            79         0.037807         692203

 

            80         0.042010         666033

 

            81         0.046652         638053

 

            82         0.051766         608287

 

            83         0.057392         576798

 

            84         0.063583         543694

 

            85         0.070397         509124

 

            86         0.077892         473283

 

            87         0.086124         436418

 

            88         0.095238         398832

 

            89         0.105068         360848

 

            90         0.115518         322934

 

            91         0.126487         285629

 

            92         0.137876         249501

 

            93         0.149419         215101

 

            94         0.161176         182961

 

            95         0.173067         153472

 

            96         0.185008         126911

 

            97         0.196920         103431

 

            98         0.210337        83063.4

 

            99         0.224861        65592.1

 

           100         0.241017        50843.0

 

           101         0.259334        38589.0

 

           102         0.280356        28581.6

 

           103         0.303142        20568.6

 

           104         0.329482        14333.4

 

           105         0.359886        9610.80

 

           106         0.394865        6152.01

 

           107         0.434933        3722.80

 

           108         0.480599        2103.63

 

           109         0.532376        1092.63

 

           110         0.590774        510.940

 

           111         0.656307        209.090

 

           112         0.729484        71.8628

 

           113         0.810817        19.4400

 

           114         0.900819        3.67772

 

           115         1.000000        0.364760

 

      _______________________________________________
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference
    For a summary of Notice 89-25, 1989-1 C.B. 662, see Tax Notes, March

    27, 1989, p. 1578; for the full text, see 89 TNT 62-16 or H&D Mar.

    20, 1989, p. 2796.

    Part I

    Section 72. -- Annuities; Certain Proceeds of Endowment and Life

    Insurance Contracts
  • Code Sections
  • Subject Areas/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2002-22476 (8 original pages)
  • Tax Analysts Electronic Citation
    2002 TNT 193-7
Copy RID