Is there an alternative to sell structured settlement? If you have an IRA, or rollover IRA, the answer is yes, IRC 72(t).
IRC 72(t) provides that amounts distributed from a traditional IRA or Roth IRA before an individual reaches age 59 1/2 are classified as premature distributions. To the extent such distributions are taxable as income, they are also subject to an additinla tax equal to 10% of the amount of the distribution.
A. Disability exception may apply to tort victims
IRC 72(t)(2)(A)(iii) provides for an exception where the participant is diabled within the meaning of IRC 72(m)(7) which defines disabled as "an individual shall be considered disabled if he is unable to engage in any substantial gainful activity by reason of any medicall determinable physical or mental impairment which can be expected to result in death or to be of long-coninued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require"
Suppose you are in a predicament and cannot meet the onerous definition of disability to qualify for the above exception, you may have another option.
B. Substantially equal exception
To qualify for another exception to the 10% penalty, the withdrawal must be part of a series of "substantially equal periodic payments" determined by the IRA participant's life expectancy or the joint life expectancy of the participant and a designated beneficiary (typically a spouse). There are generally 3 permissible methods of receiving such payments, all of which result in a different sum of money to be paid to you (life expectancy, amortization and annuity are 3 methods set forth in Revenue Ruling 2002-62-see link below). With each method you must pay taxes on the withdrawal, but you will not have to pay the 10% "excise tax" due to a premature distribution.
Once a 72(t) is created to pay out an income stream, it must continue until the age of 59 1/2 OR for a period of 5 years, whichever is longer. For example, if you start a 72(t) payout at age 57 then it must continue to age 62. On the other hand a 72(t) payout that starts at age 51 must continue to age 59 1/2. Once the 72(t) has stopped you may withdraw additional amounts from the IRA.
- A 72(t) payout does not require Court approval like a structured settlement factoring transaction does. Compare this to the 2 months or more that it typically to do a structured settlement factoring transaction due to the Court approval process.
- It may be that the net amount you receive after taxes on the 72(t) IRA distribution is better then the net you receive from the cash now pushers offering a structured settlement factoring transaction. Do the math, or have someone do the math for you.
CAUTION: 72(t) rules must be followed carefully to avoid premature distribution penalties
Revenue Ruling 2002-62 Download Rev Ruling 2002-62