72t SEPP on Qualified SPIA in IRA

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JoMoney
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Joined: Tue Jul 23, 2013 5:31 am

72t SEPP on Qualified SPIA in IRA

Post by JoMoney »

My understanding on early (before 59.5) IRA withdrawals is that the 10% penalty can be avoided by following a Code §72 (t) Substantially Equal Periodic Payments "SEPP" plan, where the withdrawals follow one of three approved methods meant to last the lifetime of the owner.

I also understand that annuities like SPIAs have their own provision that allows for early withdrawal without penalty, and at least for a non-qualified lifetime SPIA (bought from a taxable account) it seems whatever the SPIA's distributions are, if it's a lifetime SPIA it's exempted from the 10% penalty.

My question is regarding a Qualified SPIA bought with IRA money, if someone under age 59.5 converted to an IRA annuity put into a SPIA distributing immediately (lifetime) but the amount it was distributing is more than what the 72t amortization/annuitization calculation would yield amortized out at expected life table at current Applicable Federal Rates amortized (or 5%.) Would the distribution have the 10% penalty? Or is there some other exception for it being an annuity that overrides the source being from an IRA ?

For example, I'm seeing quotes for a lifetime SPIA on a 50yo male paying $6,574.80/year on $100k
When I use a Single Life Table (36.2 years for 50yo) and amortize out at the 120% AFR Mid-Term Rate (currently 4.78% but allowed to use maximum 5% based on current changes), $6,031.22
Which means the SPIA would exceed allowable penalty-free rate using the 72t amortization method. While I'm sure a lower distribution within the guidelines for penalty free withdrawal could be found or negotiated, that seems less than optimal, I'm wondering if there's any other exceptions due to it being annuitized that may apply ?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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