IRS Helps Taxpayers Preserve Retirement
Savings by Allowing a Change to Pension Distribution Amounts
Oct. 24, 02 - The
Treasury Department and the Internal Revenue Service have released
Revenue Ruling 2002-62 that will help taxpayers preserve their
retirement savings when there is an unexpected drop in the value of
their retirement savings. Some taxpayers began receiving fixed
payments from their IRA or retirement plan based on the value of their
account at the time they started receiving payments. Those taxpayers
may now switch – without penalty -- to a method of determining the
amount of their payments based on the value of their account as it
changes from year to year.
“Taxpayers have worked
hard to build their retirement savings. They shouldn’t be penalized
when the market is down,” stated Pam Olson, Assistant Secretary for
Tax Policy. “This change will help many taxpayers to preserve their
retirement savings by allowing those individuals to slow their
distributions down in the event of unexpected market downturns.”
Generally, taxpayers
are subject to an extra 10% tax (in addition to regular income tax) on
amounts withdrawn from their IRAs or employer-sponsored individual
account plans prior to reaching 59½. An exception to that tax is when
a taxpayer takes distributions as part of a series of substantially
equal periodic payments over the taxpayer’s life expectancy or the
joint life expectancies of taxpayer and beneficiary. The IRS issued
guidance in 1989 (Q&A 12 of Notice 89-25) that provided three methods
for satisfying the “substantially equal periodic payment” exception.
Two of the safe-harbor
methods described in Notice 89-25 result in a fixed amount that is
required to be distributed and could result in the premature depletion
of the taxpayer’s account in the event that the value of the assets in
the account suffers a decline in market value. Revenue Ruling 2002-62
provides relief to taxpayers who selected one of these two methods by
permitting them to change from a method for determining the payments
under which the amount is fixed to the third method under the
safe-harbor where the amount changes from year to year based on the
value in the account from which the distributions are being made.
In addition to
permitting a one-time switch in method, the revenue ruling:
-
Clarifies how an
individual can satisfy the permitted method that tracks the required
minimum distribution rules of section 401(a)(9) in light of the
recent finalization of regulations regarding those requirements;
-
Provides guidance on
what constitutes a reasonable rate of interest for determining
payments to satisfy the substantially equal periodic payment rule;
and
-
Provides a choice of
mortality tables that can be used in satisfying the permitted
methods.
