The CPA Journal

Available Exceptions for Early Withdrawal Penalties

By Edward A. Slott

Under the current IRS regulations, an IRA can be tapped before age 59 As without incurring penalties if the withdrawals are made according to the rules set out in IRC section 72(t)(2)(a)(iv).

Provided the rules are met, the withdrawals can be made at any age, even if the account holder is still working. However, the payments must continue for five years or until the individual reaches age 59 As whichever period is longer.

In addition, once the distribution method is selected, the withdrawals, called substantially equal period payments (SEPPs), cannot be modified; otherwise, the payments will become retroactively subject to the 10% early withdrawal penalty.

The Sidebar summarizes and compares the major features, advantages, and disadvantages of the three payment methods.

In several private letter rulings using the amortization and annuity factor methods, the IRS has allowed the life expectancy, interest rate, and retirement account balance to be redetermined annually, creating a hybrid method that combines the best features of the minimum distribution method with the amortization and annuity factor methods. These hybrid methods (noted in the Exhibit with an asterisk) generally result in higher payments than either method used on its own. However, if the account balance declines, the 72(t) payments may be reduced.

Edward A. Slott, CPA, of E. Slott & Company, is the editor of Ed Slott’s IRA Advisor, from which this article was adapted.

Editor:
Edward A. Slott, CPA
E. Slott & Company

Contributing Editors:
Robert H. Colson, PhD, CPA
The CPA Journal

Thomas W. Morris
The CPA Journal

This Month | About Us | Archives | Advertise| NYSSCPA

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

IRA PLANNING