IRA owner (under age 59 1/2) is receiving monthly distributions on the 30th of each month. The monthly distributions are intended to qualify for the exception to the 10% early distribution penalty under Code Section 72(t)(2)(A)(iv) affectionately known as "substantially equal periodic payments" or "SEPPs". IRA owner attains age 59 1/2 on June 15, 2003. In order to avoid modification of SEPPs under Code Section 72(t)(4), should the last distribution take place on May 30, 2003 or June 30, 2003? If you believe the answer is May 30, 2003, do you think there is the potential for the IRS to assess the recapture tax under Code Section 72(t)(4) on the basis of the fact that the SEPPs essentially terminated approximately two weeks before the IRA owner actually attained age 59 1/2?

If two weeks doesn't seem like a big deal, think about this issue in the context of annual distributions:

1.) IRA owner receives annual distributions each December 30th
2.) IRA owner attains age 59 1/2 on September 30, 2003

In order to avoid modification of the SEPPs, should the last distribution occur on December 30, 2002 or December 30, 2003?

Any insight would be greatly appreciated.

On the above scenarios, please assume that the SEPPs have continued for at least five years.

In your first scenario, it does not matter when the distribution occurs as along as it occurs by June 30,2003. The trick is to look at this on a year ( calendar of fiscal perspective) instead of month-to-month.

For instance, assume the IRA owner is required to distribute $12,000 per year. He/she decides to distribute $1,000 each month, on the 30th of each month.

He/she started distributions at age 40, which means that by age 59 ½ the duration requirements ( five years or until age 59 ½, whichever is longer ) is met.


The last year is 2003. He/she reaches age 59 ½ in August 2003. He/she may either
a) continue taking monthly payment of $1,000 until December 2003 or
b) take a lump-sum at anytime before December 2003.

It does not when the distribution occurs as long as the $12,000 is distributed for the year , by the last day of the year,