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Money put into a traditional individual retirement account can't be taken out without a penalty until the account holder reaches age 59 1/2. The penalty for early withdrawal is 10 percent of the amount taken, plus taxes at ordinary income rates. One way to avoid this penalty is to withdraw money in "substantially equal periodic payments," based on the amount in the IRA and the account holder's lifetime.
Length of Payments
Equal payments can start at any age, but must continue for five years or until the account holder turns 59 1/2, whichever is longer. If distributions start at age 35, for example, they must continue for 25 years. Passing age 59 1/2 doesn’t change the five-year rule. If an owner doesn't start payments until age 58, for instance, the payments must continue until age 63.
Timing of Payments
Equal payments can be taken out monthly, quarterly, semiannually or annually. The amount of the withdrawal is based on the account holder's age on Dec. 31 of the year the first withdrawal is made. The amount in the account is either the balance on Dec. 31 of the preceding year or any date in the current year prior to the first distribution.
An account holder cannot pick an amount, but has to use one of three ways to calculate the amount of regular withdrawals: required minimum distribution, fixed amortization or fixed annuitization. Once payments start, no more deposits can be made into the IRA. A taxpayer is allowed to change the method of calculation after payments have begun.
The required minimum distribution is the simplest of the three methods. It divides the account balance by life expectancy of the account holder or joint expectancy with a spouse, based on an Internal Revenue Service table. Because the account balance varies, it is recalculated every year. This approach usually produces the lowest payment amounts.
The more complex amortization and annuitization formulas calculate periodic distributions only once, although the IRS will allow some exceptions. Both also incorporate an interest rate chosen by the account holder and are based on amortization or annuity tables. Amortization uses IRS life expectancy tables, annuitization and an IRS mortality table. Both use interest rates not more than 120 percent of an IRS rate published in either of the two months preceding a distribution.
- Internal Revenue Service: Retirement Plans FAQs Regarding Substantially Equal Periodic Payments
- Bankrate.com: 72(t) Distributions
- The Retire Early Home Page: Can I Withdraw Money From My IRA Before Age 59½ ?
- Appleby Retirement Dictionary: Substantially Equal Periodic Payments
- Rollover Center: Substantially Equal Periodic Payments
- Forbes: The 72t Early Distribution From Your IRA
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