A:

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
(Contact Denise)

RELATED FAQS
  1. Can my annuity be funded by the proceeds from a Roth IRA?

    If I fund a SPIA with regular savings, a portion of the annual income received is taxed. After 17 years the full amount is ... Read Answer >>
  2. What are the exceptions to the premature withdrawal penalty rules for IRA accounts?

    Generally, if you are under age 59.5 and you withdraw funds from your traditional IRA, you must pay an additional 10% tax ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. Once substantially equal periodic payments (SEPP) of an IRA have started, is the ...

    Typically, if you withdraw assets from an IRA or a qualified retirement plan sponsored by your employer while under the age ... Read Answer >>
  6. 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 >>
Related Articles
  1. Retirement

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Retirement

    Tapping Retirement Funds Early – Without A Penalty

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

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  8. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
  9. Retirement

    How IRA Dividends Are Taxed

    Money in an IRA isn’t taxed until retirement, but its funds receive different tax treatment once money is withdrawn.
  10. 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.
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. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  5. Withdrawal Penalty

    Refers to any penalty incurred by an individual for early withdrawal ...
  6. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center