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payments, they can be made monthly, quarterly or at another frequency, as long as the required amount for the year is withdrawn by the end of the year.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

    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.
  5. 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.
  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

    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.
  8. 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.
  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

    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. 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. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center