Many people using the tax code’s loopholes to avoid early withdrawal penalties on IRA distributions must withdraw relatively large amounts from their IRA each year. Some of those IRAs, though, have been reduced by the two-year bear market. Because of this, some people using substantially equal periodic payments (SEPPs) to avoid a penalty are facing the complete or near-complete depletion of their accounts.
Suppose, for example, 50-year-old Joan Martin had a $600,000 IRA in 1998 and began taking $42,000 SEPPs. In early 2002, Joan’s IRA–which was heavily invested in tech stocks–is down to $300,000 but those $42,000 distributions are scheduled to continue until she is 59 1/2. By then, there might not be much left in her IRA.
It now appears that it may be possible to reduce those payments to accommodate current market conditions, by asking the IRS for a private letter ruling (PLR). Based on informal discussions with the IRS, the distribution in the above example could be reduced from $42,000 to $21,000, which would protect Joan’s IRA.
