72(t) early distribution analysis
You may choose any of the three methods on which to base your distribution amount. To avoid the 10% penalty once you begin distributions, you must continue to take the required distribution using the same method, at least annually, for the longer of five years, or until age 59½. Once distributions begin, if the series of payments is modified in any way, the 10% early distribution penalty will be imposed retroactively beginning with the first year of distribution. Exception: The five-year rule is waived upon death or disability of the IRA owner. It is also waived for IRA owners who make a one-time change from the amortization or annuitization methods to the required minimum distribution method.
For purposes of this analysis, the distribution amounts are shown as annual figures. However, you may choose to make withdrawals monthly, quarterly or semi-annually.
The amortization method. Here, the IRA account balance is treated like the mortgage amount due on a home. The IRA is "amortized" using a fixed interest rate prescribed by IRS regulations over a term equal to the account owner’s life expectancy. (A different interest [higher] could be used, but then it would require the account owner to prove the rate selected was reasonable, should the IRS inquire.) Rather than paying a lending institution, as would be done with a mortgage, the IRA pays the account owner. The annual payout is fixed at the time distributions commence and does not vary from year to year. Just as with mortgages, the higher the interest rate is, the larger the payout will be, and the shorter the payout period is, the larger the payout will be. Putting the two together, you can surmise that older individuals will receive more annual income given an equivalent amount of IRA dollars and even moreso in a high-interest-rate environment.
The annuity method. Is similar to the amortization method in that it uses the same interest rate and life expectancy, but then introduces a mortality table prescribed by regulation to pay out the IRA account as if it were an annuity. The annual payout is fixed at the time distributions commence and does not vary from year to year.
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