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February 17, 2009

Amortization Method (or Fixed amortization method)

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Definition

One of the methods used to calculate substantially equal periodic payments (SEPP), also referred to as 72(t) payments. Under the fixed amortization method, the annual payment for each year is determined by amortizing the account balance in level amounts, over a specified number of years, using the chosen life expectancy table and the chosen interest rate.

Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payment is usually determined once for the first distribution year and the annual payment is the same amount in each succeeding year

As provided under Revenue Ruling 2002-62, an individual who begins distributions in a year using either the fixed amortization method or the fixed annuitization method may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years and the change in method will not be treated as a modification within the meaning of § 72(t)(4). Once a change is made under this provision, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be a modification for purposes of § 72(t)(4).

 

Referring Cite

IRC § 72(t), Revenue Ruling 2002-62

Additional Helpful Information

  • Generally, the ‘fixed’ annuitization and amortization methods require the participant to distribute a fixed amount each year. This means that the same amount must be distributed for each year of the duration of the SEPP.
  • However, the IRS granted exceptions to three taxpayers, allowing them to recalculate the amount each year. PLRs 200432021, 200432031, 200432024. Note: A PLR cannot be cited as precedence or used as legal reference, and can be relied on only by the individual to whom it was issued.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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