A:

Typically, if you withdraw assets from an IRA or a qualified retirement plan sponsored by your employer while under the age of 59.5, you may owe ordinary income tax on these amounts, plus an additional 10% early-withdrawal penalty. However, you can avoid the early-withdrawal penalty by taking assets under a substantially equal periodic payment (SEPP) program. (For an in-depth look at SEPPs, we encourage you to read Rules Regarding Substantially Equal Periodic Payment (SEPP).)

The IRS provides three methods to calculate SEPPs. As the three methods result in different calculated amounts, you can choose the one that better suits your financial need. However, with both the amortization and annuitization methods, the interest rates and payments are determined when the calculation is performed and they do not change. According to revenue ruling 2002-62, the amounts are not recalculated/redetermined; therefore, there is no opportunity to change the interest rate.

However, if you check out Bill Stecker's May 12, 2004, article "New Private Letter Ruling On Substantially Equal Periodic Payments" (posted on the website 72t on the Net), it seems that the IRS has responded in a private letter ruling (PLR) for one of his clients allowing a recalculation of the amortization method, with the interest rate changing each year but remaining consistent with the time of year. In other words, the interest rate is determined by the time of year at which the rate is recalculated. As Stecker correctly notes, a PLR applies only to the individual to whom it was issued, but it gives a good sense of how the IRS might respond to cases with similar facts and circumstances.

Stecker and Gordon Weis are the kings of 72(t)s (Weis operates the www.72t.net board). You could post your message on their forum and see what they say (Stecker posts under the name "The Badger" and Weis posts as GFW).

As for the frequency of payments, they can be made monthly, quarterly or at another frequency, as long as the required amount for the year is withdrawn by the end of the year.

(To learn more, read Tax Treatment Of Roth IRA Distributions and Selecting The Payout On Your Annuity.)

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. I stopped distributions from my retirement account while under Rule 72(t). Will this ...

    If an individual modifies a substantially equal periodic payment (SEPP), including discontinuing the SEPP before the end ... Read Answer >>
  2. Will I incur a tax penalty when making withdrawls from my IRA in excess of my SEPP?

    Unfortunately, the IRA is "locked" for five years because of the requirement that the substantially equal periodic payment ... Read Answer >>
  3. What are the "certain requirements" that must be met for substantially equal periodic ...

    For substantially equal periodic payments (SEPPs), the distributions would occur from your IRA after you rollover the assets. ... Read Answer >>
  4. Do I have to continue SEPPs for an inherited IRA?

    You may discontinue the payments. Once the person who is taking the substantially equal periodic payment (SEPP) dies or becomes ... Read Answer >>
Related Articles
  1. Retirement

    Substantially Equal Periodic Payment (SEPP): Learn The Rules

    Taxpayers often make costly mistakes with SEPP programs because there is little guidance on what can be done in certain situations.
  2. Retirement

    Tax-Saving Advice for IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  3. Taxes

    How 401(k) Withdrawals Work When You're Unemployed

    Unemployed individuals can pursue several options when taking money out of their 401(k), but they should carefully weigh taxes and possible penalties
  4. Retirement

    Tapping Retirement Funds Early – Without a Penalty

    The IRS offers several ways to skirt the 10% penalty on early retirement distributions.
  5. Retirement

    Retirement Withdrawal Tricks You Should Know

    From SEPP to NUA, retirement withdrawal rules are full of complicated acronyms. But understanding them will help with your retirement income strategy.
  6. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  7. Retirement

    Should I Use My IRA to Pay Off My Credit Cards?

    Cashing in an IRA to deal with outstanding credit card balances may not be the best way, but sometimes it's the best available way. Here's how.
  8. Retirement

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  9. Taxes

    Estimated Taxes: Back To Basics

    Will you owe estimated taxes for the year? Here are some rules that apply and tips on avoiding any associated penalties.
  10. Retirement

    Your 401(k): Not the Best Emergency Fund

    If you have an emergency and need to access your retirement funds, you may have to pay a penalty if you dip into your 401(k). But there is a better option.
RELATED TERMS
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Rule 72(t)

    An Internal Revenue Service (IRS) rule that allows for penalty-free ...
  3. Premature Distribution

    Any distribution taken from an IRA, qualified plan or tax-deferred ...
  4. Fixed Annuitization Method

    One of three methods by which early retirees of any age can access ...
  5. Annuity Factor Method

    A calculation method to determine the amount of eligible withdrawals ...
  6. Fixed Amortization Method

    One of three methods by which early retirees of any age can access ...
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center