Normally if you are not age 59 1/2 yet and need to take withdrawals from your IRA (Individual Retirement Account), you are subject to a 10% early withdrawal penalty on what you take. But under section 72(t)(2) of the Internal Revenue Code, if you take Substantially Equal Periodic Payments (SEPP) of your IRA, you can escape this penalty.

To qualify for this method, you have to do the following:

1. You have to maintain the calculated distribution for at least five years or until you reach 59 1/2, whichever is greater.

2. The distribution has be calculated based on one of the following tables provided by the IRS: the uniform life table in Appendix A of Rev. Rul. 2002-62, the single life expectancy table in I.T. Regulations §1.401(a)(9)-9, Q&A-1, or the joint life and last survivor table in I.T. Regulations §1.401(a)(9)-9, Q&A-3.

3. You have to use one of the three methods in Revenue Ruling 2002-62 to determine what are SEPP payments: the required minimum distribution method, the amortization method, or the annuitization method.

4. You have to calculate interest using any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.

That’s all you have to do. Simple, huh? Kind of like pulling teeth without anesthetic, but if you jump through the hoops, you have a cash source that will not cost you 10% of your distributions because of the penalty. You will still owe federal and state income tax on the distributions, so this is not something you want to do unless you really, really need the money, because you have to keep taking the payments for at least five years, but if you have an emergency, this may be a solution to find a source of funds.

Call or email me and we can run the numbers and see if this exemption will work for you.

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