Can I Use Substantial Equal Periodic Payments from an IRA to Escape the Early Distribution Tax

In an ideal world, when you open an individual retirement account (IRA), you will not need to start making withdrawals before the age of 59 ½. However, life does not always go according to plan and financial hardships do occur. In most cases, if you withdraw funds from your IRA before the age of 59 ½, the Internal Revenue Service (IRS) will consider it an early distribution. As such, you will be subjected to taxes and penalties. However, this is not true in all cases.

Substantial Equal Periodic Payments

If you take an early distribution, the funds are subjected to your regular income taxes as well as an additional 10% penalty fee. The Substantial Equal Periodic Payment (SEPP) method allows taxpayers to take an early distribution without having to pay hefty taxes. If you are facing a short-term financial crisis, you might want to consider a different avenue. However, if you are considering using your retirement account – make sure you understand the SEPP rules.

SEPP Rules

There are some basic rules that apply if you opt for using the SEPP method for an early distribution. These include:

  • There are no age restrictions under a SEPP;
  • All payments must be “substantially equal” which means that you cannot modify them every year;
  • Payments must be computed as if you were intending to distribute your IRA’s funds over the course of your entire life (or the combined life of you and your spouse in a joint account);
  • You cannot discontinue or alter your payments for at least five years; and
  • If you have not turned 59 ½ after those five years have passed, you must wait until then to make any changes.

IRS-Approved SEPP Calculations

The IRS has three approved ways of calculating your SEPP amounts. All three can result in varying payments. By offering these various calculation methods, the IRS allows you to pick the repayment plan that works best for you. These options include Amortization, Annuitization, and Required Minimum Distribution (RMD) methods.

Ask an Expert

At IRA Business Trust, our professionals understand how convoluted tax laws can seem. We also understand that financial hardships can happen to anyone at any time. Because of this, we do our best to provide you with quality advice and genuine support. Our experts can help answer any questions you have regarding your retirement account and financial options. If you would like to speak to an expert at IRA Business Trust about retirement options or related items, please contact us today.

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