- 1 -
March 27, 1989
TO: PENSION MEMBERS NO. 21-89
RE: IRS NOTICE CONCERNING TAXATION OF DISTRIBUTIONS
__________________________________________________________
Attached is a copy of IRS Notice 89-25, which provides
guidance concerning the taxation of distributions from qualified
plans, section 403(b) arrangements and IRAs. The notice
clarifies IRS Notices 87-13 and 87-16. (See Institute Memoranda
to Pension Members Nos. 9-87 and 10-87, dated February 3, 1987.)
The notice sets forth three alternative methods of
computing the "series of substantially equal periodic payments"
from an IRA or individual account plan exempt from the section
72(t) tax on early distributions under section 72(t)(2)(A)(iv).
First, the participant may determine the annual payment using a
method that would be acceptable for purposes of calculating the
required minimum distribution under section 401(a)(9). Second,
the participant may amortize the account balance over the life
expectancy of the participant or the joint life and last survivor
expectancy of the participant and the beneficiary at an interest
rate not exceeding a reasonable rate on the date payments
commence. Third, the participant may divide the account balance
by an annuity factor derived using a reasonable mortality table
and an interest rate not exceeding a reasonable rate on the date
payments commence. The applicable annuity factor is the present
value of an annuity of $1 per year beginning at the participant's
attained age in the first distribution year and continuing for
the life of the participant.
In addition, notice also advises that a distribution to a
nonspouse alternate payee under a qualified domestic relations
order may not be rolled over into an IRA by the alternate payee
because the distribution would be includible in the gross income
of the participant rather than in the gross income of the
alternate payee. The IRS further states, however, that the
participant may roll over such amounts by making a contribution
to an eligible retirement plan if the requirements of section
402(a)(5) are otherwise satisfied.
- 2 -
The notice also addresses the withholding requirements for
qualified plan distributions to nonspouse alternate payees, the
effective date of section 72(t) for section 403(b) arrangements,
and the tax treatment of distributions from an IRA when the
participant's basis exceeds the value of the IRA.
We will keep you informed of further developments.
Kathy D. Ireland
Assistant General Counsel
Attachment