Recomputation of annual distributions from IRA to include annual 4 percent COLA, will modify distributions under §72(t)(4), thus triggering tax. Y, who has retired, is the owner of a §408 individual retirement account(IRA), called IRA 1, which was funded with a rollover of a lump sum distribution from a corporate retirement plan in which Y participated. Y, who will attain age 59 1/2 in 2002, began to take distributions from the IRA in 1993, calculating an annual distribution amount using methodology intended to avoid triggering the §72(t )(1) tax on premature distributions by qualifying for the exception of §72(t)(2)(A)(iv) for substantially equal periodic payments.
Because the earnings on the IRA 1 assets have exceeded the expected earnings and the account has more than doubled in amount, Y wants to change the IRA distribution method to include an annual cost of living adjustment (COLA)of 4 percent, and to include the payment of a one-time catch-up amount equal to the COLAs that would have been paid in prior years beginning in 1993. Under this methodology, the annual distribution amount for any year will be 104 percent of the annual distribution amount for the prior year.
The IRS noted that both the change in the annual distribution amount and the one-time catch-up payment are not changes due to death or disability that are excepted from the clawback effect of §72(t)(4), and so refused to rule as Y requested. It ruled, instead, that the proposed recalculation of the annual distribution amount to include an annual 4 percent COLA from 1993, if made in a series of substantially equal periodic payments using one of the methods described in I.R.S. Notice 89-25, will result in a modification of the annual payments under §72(t)(4).
In addition, the IRS held that the distribution of a one-time catch-up payment equal to the amount by which the annual distributions for prior years, if adjusted for COLAs, exceed the annual distributions actually made, will result in a modification of the annual payments under §72(t)(4).
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