Are You in Need of a Distribution from your IRA to Pay Expenses?
To minimize or possibly avoid tax penalties, arrange to receive “substantially equal period payments” (SEPPs) from the IRAs. You may not have to pay a penalty if you handle the situation correctly – no matter how old you are.
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SEPPs must meet specific requirements.
Normally you would pay a 10% penalty if you take withdrawals from an IRA prior to age 59 ½. The penalty is added on top of the regular federal income tax you would owe.
You are exempt from the 10% penalty tax if you arrange to receive a series of SEPPs for at least five years or until you reach age 59 ½ whichever is later. Meaning that if you are 50 years old now, you would need to receive SEPPs for at least 9 ½ years. The IRS bases the payment amounts on your life expectancy (or the joint life expectancy of yourself and a designated beneficiary).
There are three possible methods that may be used for calculating the SEPPs; however, if you substantially modify the payment method before age 59 ½ (or five years, if that’s later), the IRS imposes the 10 penalty tax on all the payments.
If you find yourself in need of distributions prior to 59 ½, talk to your account about one of these three IRS approved methods:
1. Required Minimum Distribution
2. Fixed Amortization Method
3. Fixed Annuitization Method
Use the SEPP as a last resort as IRAs and qualified plans are designed for your retirement.