Example:
Bob, age 50, is the owner of an IRA from which he would like to start taking distributions beginning in 2011. He would like to avoid the §72(t) additional 10% tax imposed on early distributions by taking advantage of the substantially-equal-periodic-payment exception.
- Bob’s IRA account balance is $400,000 as of December 31, 2010 (the last valuation prior to the first distribution)
- 120% of the applicable federal mid-term rate is assumed to be 2.98%, and this will be the interest rate Bob uses under the amortization and annuitization methods
- Bob will determine distributions over his own life expectancy only
Required minimum distribution method
The required minimum distribution method consists of an account balance and a life expectancy (single life or uniform life or joint life and last survivor each using attained age(s) in the distribution calculation year). The annual payment is redetermined each year.
For 2011, the annual distribution amount is calculated by dividing the December 31, 2010, account balance ($400,000) by the single life expectancy (34.2) obtained from I.T. Regs. §1.401(a)(9)-9 Q&A-1, using age 50 ($400,000/34.2 = $11,696).
For subsequent years, the annual distribution amount will be calculated by dividing the account balance as of December 31 of the prior year by the single life expectancy. Use the same single life expectancy table used in prior year calculations, but use the current age. For example, if Bob's IRA account balance, after the 2011 distribution has been paid, is $408,304 on December 31, 2011, the annual distribution amount for 2012 ($12,261) is calculated by dividing the December 31, 2011 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of I.T Regulations §1.401(a)(9)-9 using age 51 ($408,304/33.3 = $12,261).
Fixed amortization method
The fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life uniform life or joint life and last survivor) and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
For 2011, the annual distribution amount is calculated by amortizing the account balance ($400,000) over a number of years equal to Bob’s single life expectancy (34.2) (obtained from Q&A-1 of I.T. Regs. §1.401(a)(9)-9 using age 50), at a 2.98% interest rate (April 2011 rates). The annual distribution amount is $18,811.
Fixed annuitization method
The fixed annuitization method consists of an account balance, an annuity factor and an annual payment. The annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
Under this method the annual distribution amount is equal to the account balance ($400,000) divided by an annuity factor that would provide one dollar per year over Bob’s life, beginning at age 50. The age 50 annuity factor (21.345) is calculated based on the Rev. Rul. 2002-62 Appendix B mortality table and an interest rate of 2.98%. The annual distribution amount is calculated as $400,000/21.345 = $18,740.
Source: https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments