If you initiated early distributions from your Individual Retirement Account (IRA) in the last couple of years using a Substantially Equal Payment plan, your annual distribution amount may be more than your current account balance can bear. You may think there is nothing you can do to alter your distribution amount and slow down the depletion of your IRA account. This is not true. The IRS now permits you to make a one-time, permanent reduction to your annual distribution amount.



The primary purpose of an IRA is to accumulate assets for retirement. Therefore, distributions taken before age 59 ½ are subject to a 10% premature distribution penalty, unless an exception applies. One such exception is a Substantially Equal Payment plan, which as you know is subject to several requirements. For example, your may not stop or otherwise modify your distributions until the longer of five years or until you reach age 59 ½.

Under your Substantially Equal Payment plan, your distribution amount was probably calculated using one of three IRS approved methods: annuity, amortization or life expectancy. The annuity and amortization methods are used more often because they produce the large distribution amounts that are easily matched to income needs.

Both the amortization and annuity methods have a fixed annual distribution amount. It is calculated once - at the beginning of your payment stream – and the annual distribution amount may not be modified. This is what distinguishes the amortization and annuity methods from the life expectancy method. If you are using one of these methods and your account balance experiences a significant decline, you may be running a substantial risk of depleting your entire account.

The annual distribution amount for the life expectancy method is recalculated annually based on your current age and account balance. If you have experienced a significant decline in your account balance because of the current economic conditions, your annual distribution amount will be automatically adjusted downward. This flexibility ensures that distributions continue at a rate your current account balance is capable of sustaining.

If you are currently using the annuity or amortization method, the IRS now permits you to make a one-time, permanent switch to the life expectancy method so that you may reduce your annual distribution amount. For example, assume you were a 54-year-old individual taking distributions under the annuity method of $49,460 each year. If you elect make the switch, your distribution amount for the current year would be reduced to $14,234. This is a significant reduction.

In evaluating whether to make this switch, you must consider many issues. For example, you must weigh the effect of continuing your current distribution stream against taking a reduced annual distribution amount. You must also consider the timing of the switch. Not everyone will be able to make the switch for the 2005 tax year. Before you make the one-time, permanent switch, please discuss these and other relevant issues with your financial advisor or tax professional.