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Withdrawals before 59 ¹/_² without penalty

Substantially Equal Payments and Section72(t) withdrawals

The IRA holder that wishes to take distributions before reaching 59 ¹/_² and yet avoid the 10% early distribution penalty may use the special exception of a series of substantially equal periodic payments (IRC Sec. 72(t)(2)(A)(iv). This exception was initiated with the Tax Reform Act of 1986. Some of the restrictions that the IRA holder should be aware of are listed below.

1. Payments must be made at least annually.
2. A series of distributions begun before age 59 ¹/_²  must continue unchanged for five years or until the IRA holder reaches age 59 ¹/_^2, whichever is later. Note that this five-year rule is waived upon death or disability.
3. Payments must be scheduled over the single life expectancy of the IRA holder or over the joint life expectancy of the IRA holder and his or her designated beneficiary.
4. The Internal Revenue Code states that once the payment schedule is established, if the series of payments is modified in any way (other than by reason of death or disability) the 10% early distribution penalty tax, plus interest, will be applied retroactively beginning with the first year of distribution. If a Traditional IRA holder, receiving a series of substantially equal periodic payments according to IRC Sec. 72(t)(2), converts the Traditional IRA to a Roth IRA, the conversion is not considered a modification of the payment schedule, provided the originally scheduled series of payments continues after the conversion from the Roth IRA (Prop. Treas. Reg. 1.408A-4, Q&A 12).