Creating Income

• The premise of using Reg 72t is to create a regular income stream from the IRA assets. To be clear, the IRS defines the income stream as consisting of a series of payments made at regular intervals. Payments must be substantially equal, meaning the same amount, within the guidelines of the income election method. The intervals must occur periodically, at least once per year.
  
  

Income Election Method

• There are three methods of calculating the income election to comply with the substantially equal payment requirement. The first method is called a required minimum distribution method and determines annual payments based on single, uniform or joint life factors. Distributions are adjusted annually based on age. The fixed amortization method uses life expectancy similar to the required minimum distribution method but calculates a fixed interest rate for growth. Distributions are fixed once calculated. The fixed annuitization method uses the mortality tables rather than the life expectancy factors to create a fixed payment. Though similar to fixed amortization, the tables provide slightly different dollar values.
  
  

Taxation of Distributions

• Distributions from the IRA are still subject to taxation. Reg 72t only waives penalties on taxable distributions. This means all distributions are added to income when taken from traditional IRA accounts. Roth IRAs are tax-free distributions. For Roth distributions, only earnings are added to income if the distribution is not eligible for normal tax-free distributions. Speak with your Roth IRA custodian to establish how much of each payment is taxable.
  
  

Duration

• To take advantage of Reg 72t, the periodic payments must occur at least once per year for a minimum of five years. This is an irrevocable election that can only be adjusted once the five-year minimum is reached or the IRA owner reaches age 59 1/2. If you have more than one IRA, you can utilize Reg 72t on one, keeping the other IRA intact if necessary.