Escape the 10% Penalty on IRA Distributions with Substantially Equal Periodic Payments

IRA DistributionsIf you take IRA distributions or 401(k) distributions from your IRA or employer’s retirement plan before the age of 59-1/2, normally you will get tagged with a 10% penalty, in addition to the income taxes owed on the distribution. However, there is a strategy to avoid this penalty by taking “Substantially Equal Periodic Payments”. This strategy allows you to begin making withdrawals before the age of 59-1/2 and avoid the 10% penalty.

There are some rules you must follow to avoid the penalties:

  • The payments must be made at least annually
  • The payments must be calculated using one of three specific IRS methods and are based on the life expectancy of the owner or of the owner and beneficiary.
  • The payments must be made for at least 5 years, or until you turn 59-1/2

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