72(t) Substantially Equal Payment Calculator

This is any rate less than or equal to 120 percent of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins. Learn more information about this topic. For April 2007, 120 percent of the Federal Mid-Term rate is 5.54 percent.

It is important to note that the associated law that created 72(t) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that it will not allow people to circumvent the requirement of substantially equal payments throughout your lifetime by using an unreasonably high interest rate.

72(t) withdrawals set up prior to January 2003 had some flexibility in the choice of the reasonable rate to use. However, in 2002, the IRS issued new rules stating that only rates less than or equal to 120 percent of the Federal Mid-Term rate would be considered reasonable. You are now required to use a rate that is less than or equal to 120 percent of the Federal Mid-Term rate.

• Required minimum distribution method: This is the simplest method for calculating your substantially equal payments, but it also typically produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31 of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
• Fixed amortization method: With this method, the substantially equal payments are determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table, or joint life expectancy with your oldest named beneficiary. Once determined, the payment amount will not change from year to year.
• Fixed annuitization method: This method uses an annuity factor to calculate your substantially equal payments. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per month beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer. For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8 percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the mortality table published in IRS Revenue Ruling 2002-62, which is a non-sex based mortality table. Once determined, the payment amount will not change from year to year.

In addition, on July 3, 2002, the IRS ruled that you could change your distribution type one time without penalty from the Annuitized or Amortized methods to the Required Minimum Distribution method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception, please see Revenue Ruling 2002-62 on www.treasury.gov.

If payments are changed for any reason other than death or disability before age 59½ or within five years, all prior distributions may be subject to a retroactive application of the penalty tax, plus interest. It is important to remember that while 72(t) distributions are not subject to the 10 percent penalty tax for early withdrawal, all applicable income taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.