If you’re a military member considering retiring completely after 20+ years of service, you are certainly concerned about how you can access savings in IRAs and perhaps in your TSP if you’re putting money away in these accounts. You know that these accounts generally cannot be accessed before you’re 59 1/2 without suffering a 10% penalty.

There is another option, however. Using section 72(t) of the tax code you can, in fact, take annual payments out of these accounts. The discussion below is from the IRS web page.

**How are annual, substantially equal periodic payments determined for purposes of the required minimum distribution method, the fixed amortization method and the fixed annuity method?**

An example of the required distribution method, an example of the fixed amortization method and an example of the fixed annuity method using the methodologies described in Rev. Rul. 2002-62 are set forth.

**Facts:**

Mr. B is the owner of an IRA from which he would like to start taking distributions beginning in 2003. Mr. B will celebrate his 50th birthday in January 2003. Mr. B would like to avoid the additional 10% tax imposed on early distributions under section 72(t)(1) by taking advantage of the exception in section 72(t)(2)(A)(iv) for distributions in the form of substantially equal periodic payments.

**Assumptions:**

1. Required minimum distribution method

For 2003, the annual distribution amount ($11,695.91) is calculated by dividing the December 31, 2002, account balance ($400,000) by the single life expectancy (34.2) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used.

$400,000/34.2 = $11,695.91

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 obtained from the same single life expectancy table using the age attained in the year for which distributions are calculated. For example, if Mr. B’s IRA account balance, after the 2003 distribution has been paid, is $408,304 on December 31, 2003, the annual distribution amount for 2004 ($12,261.38) is calculated by dividing the December 31, 2003 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 51 is used.

$408,304/33.3 = $12,261.38

2. Fixed amortization method

For 2003, the annual distribution amount will be calculated by amortizing the account balance ($400,000) over a number of years equal to Mr. B’s single life expectancy (34.2) (obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used), at a rate of interest equal to 4.5%. If an end-of-year payment is calculated, then the annual distribution amount in 2003 is $23,134.27. Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

3. Fixed annuitization method

Under this method the annual distribution amount for 2003 is equal to the account balance ($400,000) divided by the cost of an annuity factor that would provide one dollar per year over Mr. B’s life, beginning at age 50 (i.e., the actuarial present value of an annuity of one dollar a year payable for the life of a 50 year old). The age 50 annuity factor (17.462) is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of 4.5%. Such calculations would normally be made by an actuary.

The annual distribution amount is calculated as

$400,000/17.462 = $22,906.88

Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

Using these techniques, the IRS basically allows you to create your own lifetime annuity with your IRA funds. Just remember that you’ll need to structure your account to accommodate these distributions. I recommend you take a look at Ray Lucia’s “Buckets of Money” strategy to ensure that you have sufficient liquid assets in order to prevent you from having to liquidate long term investments during market downturns to allow the distribution.

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