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Penalty Free Early Distributions May 23, 2008

Posted by Jeff Nabers in : Money, Personal Enjoyment, Self Directed IRA Solo 401k , add a comment

Probably one of the must unknown facets of retirement planning is that you can distribute before age 59 ½ for any reason without paying the extra 10% early distribution tax. How?

Substantially Equal Periodic Payments

  1. Set a distribution schedule calculated using IRS tables
  2. The schedule must have regular payments of a certain consistent amount.
  3. You must make receive these distributions from your retirement account either until you reach age 59 ½ or for a 5 year period… whichever is longer.

Internal Revenue Code Section 72(t) is where the extra 10% tax for “early distributions” (before age 59 ½) is imposed. However, if you read on to IRC 72(t)(2)(A)(iv) it is explained that the 10% tax is not applicable to any distribution that is part of a series of Substantially Equal Periodic Payments – or SEPP for short.

To give you an idea of how this works using calculations from IRS life expectancy tables, let’s examine a fictional case study with round numbers for simplicity:

Jared is considering early retirement at age 45, and over the years he has grown his IRA to an asset value of $2,000,000. He isn’t sure whether he wants to completely retire, work part time, pursue a career change, or start a new business. Let’s take a look at his options… (more…)