A subsection of Internal Revenue Code Section 72(t) states that you can avoid early withdrawal penalties by taking “substantially equal periodic payments” (commonly referred to as SEPP or 72(t) withdrawals) for any type of IRA. The general rules for SEPP withdrawals are as follows:
1. You must make the withdrawals regularly, at least once every year.
2. You must make withdrawals for either five years or until you reach age 59½, whichever is longer. Here are two examples. Retiring at 40? You will need to make withdrawals for almost 20 years. Retiring at age 56? You will need to make withdrawals until age 61.
3. You must wait until these equal payments end before you can start taking unrestricted amounts of money out of your IRAs.
4. If you decide to do a 72(t) withdrawal, you cannot change your mind. If you do, you will owe a 10% penalty retroactive to your first withdrawal plus interest!
You must also calculate the amount of your SEPP according to three IRS-approved methods: required minimum distribution method, the fixed amortization method, or the fixed annuitization method.
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