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Old 01-21-2008, 05:04 PM
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Default Substantially equal payments

If you have an inflation-adjustment (say, 3%) on your annuitized payments out of a retirement plan, are those considered substantially equal payments by the IRS? Or are the payments subject to the 10% early withdrawal penalty?

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Old 01-21-2008, 06:11 PM
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Originally Posted by Drzy View Post
If you have an inflation-adjustment (say, 3%) on your annuitized payments out of a retirement plan, are those considered substantially equal payments by the IRS? Or are the payments subject to the 10% early withdrawal penalty?

My Google skills are failing me...
My gut reaction says that COLAs (that satisfy the applicable rules) would not cause a stream of payments to fall outside the "substantially equal" exception under Code Section 72(t). My Google skills failed me too when I tried to find some authority for this though.
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Old 01-23-2008, 10:21 AM
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Seems to me that I looked this up specifically once upon a time and discovered, probably in the regs somewhere, that specified COLAs were OK. The problem would come if there was an unusual change in the payout scheme, but something like "CPI" increases or a level percentage (that was reasonable) were not only acceptable but specifically allowed. If I can remember where I found the reference, I'll try to remember to post it.
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Old 01-25-2008, 06:13 PM
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oops!: I just found this posting, if I find any updates, I'll let you know:

"Q. Can a Cost of Living Adjustment (COLA) be included?

A. Under Rev. Rul. 2002-62 COLA Increases are not allowed for plans adopted after 12/31/2002. Prior to 01/01/2003, there were at least 2 PLRs that allowed COLA increases<
  • PLR 9503631 - This annual distribution amount will be increased by a 3 percent cost-of-living factor for each year after 1994. Thus, the annual distribution amount for 1995 will equal 103 percent of the 1994 distribution amount, and for years subsequent to 1995 the annual distribution amount will equal 103 percent of the prior year annual distribution amount.
  • PLR 199943050 - Absent appropriate language permitting annual cost of living adjustments at the time of the initial substantially equal periodic payment, the recalculation of the annual distribution amount to include a 4% cost of living adjustment, and a one-time catch-up payment, would be a modification of the distributions that would trigger the premature distribution penalty."
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