The good news: This individual will not be subject to the additional 10 per cent tax if they do not receive substantially equal periodic payments.
In addition, this ruling provides guidance on what constitutes a reasonable interest rate to determine payments which satisfy the substantially equal periodic payment requirement.
Avoiding the Penalty Using Substantially Equal Periodic Payments
If other exceptions are not available, a taxpayer might nevertheless avoid the penalty by arranging to receive substantially equal periodic payments annually or more frequently.
Under the substantially equal periodic payment
exception, the account owner must withdraw a substantially equal amount from an IRA annually for five years or until the taxpayer reaches age 59 1/2.
Accordingly, the proposed method of determining periodic payments satisfies one of the methods described in Notice 89-25 and results in substantially equal periodic payments
within the meaning of Sec.
408A-4, Q&A-12, provides that Roth IRA distributions that are part of a series of substantially equal periodic payments
begun under a traditional IRA (and before a Roth IRA conversion) to which the four-year spread applies are subject to the Regs.
72(t)(4) provides that, if the series of substantially equal periodic payments is subsequently modified within five years of the date of the first payment (or prior to age 59 1/2), the exception to the 10% tax under Sec.
Notice 89-25, Q&A-12, provides three methods of distribution by which a series of payments may satisfy the substantially equal periodic payments exception.
It also precludes source taxation of distributions from nonqualified deferred compensation plans if those distributions are part of a series of substantially equal periodic payments
(not less frequently than annually) made for:
Substantially equal periodic payments
In Letter Ruling 9221052,(68) the IRS allowed a participant receiving substantially equal periodic payments
from a terminating qualified money purchase plan to roll over the assets and continue receiving payments from an IRA without incurring ring a Sec.
Notice 89-25(128) did not expressly address the situation in which a person with multiple IRAs receives substantially equal periodic payments
determined using only one IRA balance.