PHOTO: A standard gold Cross pen sitting on top of the cover of a manual for the Hewlett-Packard Model HP-12C financial handheld calculator manufactured circa 1982, which I used to calculate the fixed amortization amount for my IRA required by the IRS starting at Age 70-1/2. It is shown to the left of a slightly older HP-41C scientific handheld calculator that was so advanced it could be interfaced to the internet cloud still in use today. See previous posts Fixed amortization option for IRA distribution versus required minimum distributions (8/6/13) and HP 12c financial calculator history (6/21/06)
I am at the age when the IRS will soon be requiring me to withdraw money from my Individual Retirement Account and pay ordinary income taxes on it. Most people use the required minimum distribution method starting at age 70-1/2 based on the idea that keeping the money growing tax-free in an IRA as long as possible will minimize taxes paid.
I have also considered using the IRS-approved IRA distribution method of taking "substantially equal payments," in lieu of taking the "required minimum distributions" starting at Age 70-1/2.
Although it no longer applies to me, I had previously considered using IRS rules that permit a penalty-free early IRA withdrawal, by using the same "substantially equal payments" method I am considering using today, however, this has some other restrictions that will not apply to me because I will be starting withdraws from my IRA after age 59-1/2.
IRS guidelines describe a "fixed amortization method" for calculating the "substantially equal payments" amount by using the IRS "life expectancy table" that states a 59 year old should live 37.8 years longer and a 60 year old will live 36. 8 years longer. The law requires the calculation be reasonable and one IRS Bulletin says the interest rate used must be less than 120% of the "Federal Mid-term Rate" for either of the two months before the early distribution begins, if the distribution is started early before age 59-1/2.
Below is an example calculation using an HP 12-C financial calculator to figure out an IRA distribution amount's equivalent interest rate:
- Given an IRA balance on Apr. 30, 2014 of $452,437.25 before the IRA distributions of $14,076 per year were started at age 59-1/2 with a 37 years life expectancy:(be sure to use yellow button to clear financial registers before entering any numbers listed below)
- n = 37 years number of annual payments based on life expectancy at age 59-1/2
- PV = $452,437.25 present value of IRA Apr. 30, 2014
- PMT = -$14,076 annual distribution from IRA = $1,173 per month x 12 months per year
- FV = $0 future value of IRA after 37 years assuming complete payout
- Press the "i" button without entering any amount and the HP-12C calculates:
- i= 0.76% amortization interest rate
For reference, assuming a 0% rate at age 59-1/2, and a May 30, 2014 IRA balance of ($461,484.05 / 37 years life expectancy) / 12 payments per year = $1,039.38 per month versus the above chosen distribution = $1,173 per month (or $14,076 per year).
The IRS life expectancy table ranges from 27.4 years at age 70 to 1.9 years at age 115 and over, which will change the IRA distribution values calculated above for every year it is done, unless the substantially equal payments method is used.
Some ley links to IRS instructions and documents for calculating IRA distributions:
- "Retirement Topics - Required Minimum Distributions (RMDs)" irs.gov accessed Oct. 7, 2014 Page Last Reviewed or Updated: 03-Jul-2014 links to a life expectancy table:
- IRS "Publication 590 - Additional Material," irs.gov accessed Oct. 7, 2014 - at age 70-1/2 you must make an IRA withdrawal using a life expectancy of 27.4 year at age 70 (e.g. 1/27th of the IRA account balance must be withdrawn and ordinary taxes paid on the balance - the table at age 80 shows a life expectancy of 18.7 years and if over 115 years old you must use a life expectancy of 1.9 years.
- "Retirement Plans FAQs regarding Substantially Equal Periodic Payments," irs.gov Page Last Reviewed or Updated: 30-Apr-2014 accessed Oct. 6, 2014
- "Code of Federal Regulations (Annual Edition),"gpo.gov
- Internal Revenue Service, Treasury 1.401(a)(9)-9 (PDF) - joint life and last survivor table linked from "Joint life and last survivor table in I.T. Regulations 1.401(a)(9)-9, Q&A-3" accessed Oct. 6, 2014
- "Rev. Rul. 2002-62 Section 72.--Annuities; Certain Proceeds of Endowment and Life Insurance Contracts," irs.gov accessed Oct. 6, 2014 (PDF) - 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.
- "Rev. Rul. 2012-20," irs.gov (PDF) accessed Oct. 6, 2014 - federal mid-term rate - Rev. Rul. 2012-20 This revenue ruling provides various prescribed rates for federal income tax purposes for July 2012 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. - Applicable Federal Rates (AFR) for July 2012 Mid-term 120% AFR 1.10%
- Federal midterm rate "Section 7520 Interest Rates for Prior Years," irs.gov accessed Oct. 6, 2014 and for this year go to
- "Section 7520 Interest Rates," irs.gov Page Last Reviewed or Updated: 19-Sep-2014 accessed Oct. 6, 2014
- Use the uniform life table in Appendix A of Rev. Rul. 2002-62 - see "Rev. Rul. 2002-62 Section 72.--Annuities; Certain Proceeds of Endowment and Life Insurance Contracts," irs.gov accessed Oct. 6, 2014 (PDF)
