Early Withdrawals using Substantially Equal Periodic Payments

Submitted by David Diamond on Thu, 2015-02-26 18:56

I took my first traditional IRA early distribution in Nov. 2010 based on one of the acceptable annuitization methods. I have taken the identical distribution each year afterwards, in total, although at different times of the year and in varying amounts. I turn age 59 1/2 in June 2018.

What are my options for 2018? Must I still take the same distribution for that year? If I do not take out any money that year before I’m 59 1/2, am I free to take out whatever I want after I’m 59 1/2? If I take out a portion of the total distribution before I’m 59 1/2 in 2018, what is my obligation and timing for the rest of the year to avoid any tax penalty?



Submitted by Alan - IRA critic on Thu, 2015-02-26 19:01

You have 3 options in 2018 prior to the date you reach 59.5. After you reach 59.5 the plan is over and you can take as much or as little out as you wish. There would be separate 1099R forms for distributions before and after 59.5:

  1. Distribute nothing
  2. Distribute the full annual distribution
  3. Distribute a pro rated annual distribution by the month ending with the month prior to the month you reach 59.5.

Submitted by David Diamond on Fri, 2015-02-27 03:50

Alan-iracritic: thanks for your quick response – it makes perfect sense.  Everything I’ve read addresses the age 59 1/2 and 5 year requirements, but does not provide specifics about the final year options.  Is there any revenue ruling or IRS letter that discusses this, or is your response based on reasonable interpretations by tax professionals?

Submitted by Alan - IRA critic on Fri, 2015-02-27 16:33

  • Since there are no supporting Regs to the tax code, and various revenue rulings have not directly addressed stub year questions, IRS acceptance of various issues has been used to interpret whether a plan has been modified or not. The IRS has consistently passed final stub year choices limited to the 3 posted above.
  • That said, there is still logical rationale behind those choices. 72t plans are calendar year plans and distributions are not required until the end of each calendar year. Therefore, taking nothing in the final year is permitted as long as at least 5 years of distributions have been taken in prior years. Likewise, taking the full annual is permitted because it matches the calculation and is done prior to plan modification. Pro rating is also acceptable since it is acceptable in the first stub year. With respect to pro rating, the IRS apparently does not care whether the last month counted is the month prior to the plan modification date or the month including the plan mod rate.

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