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payments, they can be made monthly, quarterly or at another frequency, as long as the required amount for the year is withdrawn by the end of the year.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 am in the second year of taking SEPP distributions from my IRA. Can I transfer ...

    The most recent guidance issued by the IRS and the Treasury Department is Revenue Ruling 2002-62. There is some disagreement ... Read Answer >>
  2. I want to purchase a five-year period certain single premium immediate annuity (SPIA) ...

    The income from a SPIA IRA is subject to the early distribution penalty unless an exception applies. As you may know, the ... Read Answer >>
  3. I understand that I can withdraw from a 401k the year I turn 55 without the 10% penalty ...

    You are referring to the rule that states that distributions from your qualified plan (including 401k, profit sharing, money ... Read Answer >>
  4. I withdrew funds from my Roth IRA to contribute elsewhere. How will I be taxed?

    If you close the Roth IRA now and withdraw the balance, you will be taxed on the earnings unless the distribution is qualified. ... Read Answer >>
  5. As a temporary resident of the US, can I withdraw funds from my Traditional IRA without ...

    Should you decide to invest in a Traditional IRA and receive a tax deduction for your contribution, the amounts that you ... Read Answer >>
  6. Can I take money out of my Individual Retirement Account (IRA) while working?

    Can I take money out of my IRA plan if I'm still working? Yes, you can take money out of your IRA plan if you’re ... Read Answer >>
Related Articles
  1. Personal Finance

    Tax-Saving Advice for IRA Holders

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

    Tapping Retirement Funds Early – Without A Penalty

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

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  4. 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.
  5. 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.
  6. 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.
  7. Retirement

    Retirement Plan Tax Form 5329: When To File

    Read this if you've taken early distributions or owe excess-contribution or excess-accumulation penalties.
  8. 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.
  9. Retirement

    How an IRA Works After Retirement

    You've read a lot about saving for your future retirement with IRAs. But what happens to the account when the future is here, and you actually retire?
  10. Retirement

    Can You Afford To Retire Early?

    Early retirement is the hope of many people currently in the workplace. So, how do we get there - and what are the downsides?
RELATED TERMS
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Premature Distribution

    Any distribution taken from an IRA, qualified plan or tax-deferred ...
  3. Annuity Factor Method

    A calculation method to determine the amount of eligible withdrawals ...
  4. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  5. Required Minimum Distribution Method

    One of three methods by which early retirees of any age can access ...
  6. Payment Option ARM

    A monthly adjusting adjustable-rate mortgage (ARM) which allows ...
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center