The income from a SPIA IRA is subject to the early distribution penalty unless an exception applies. As you may know, the substantially equal periodic payment (SEPP) exception is usually calculated by using one of three IRS approved safe-harbor methods. However, the IRS may allow individuals to use other methods. Potentially, this could include the scheduled income received from the SPIA. To be sure, the individual should consult with the IRS, preferably in writing, for approval to use a non safe-harbor method; his or her tax professional should also be consulted on the matter.
One means of receiving a written determination from the IRS is by applying for a private letter ruling (PLR). Individuals should bear in mind that a cost is associated with applying for a PLR. The instructions for filing for a PLR are included in Revenue Procedure 2003-4 in Internal Revenue Bulletin 2003-01.
For additional information making withdrawals from you IRA, read Taking Penalty-Free Withdrawals From You IRA, Avoiding IRS Penalties On Your IRA Assets and Retirement Plan Tax Forms You May Need To File.
This question was answered by Denise Appleby