Taking an IRA distribution before age 59 1/2 usually results in a 10 percent penalty. That’s in addition to ordinary income tax on the distribution. There are several exceptions to the penalty but most (disability, for instance) are not easy to claim.
However, all IRA owners can avoid the 10 percent penalty by taking a series of substantially equal periodic payments (SEPPs). There are several ways to take SEPPs, based on your life expectancy. You can ask your IRA custodian or go online to search for a “72(t)” calculator.
In any case, you’ll be allowed to take a set amount of money every year, penalty-free. You must keep up your SEPPs every year for at least five years or until age 59-1/2, whichever comes later. If you deviate at all, you’ll owe the 10 percent penalty on all premature distributions.
Suppose you start a SEPP at age 50, taking $10,000 a year. At age 55, after taking $50,000 worth of IRA distributions, you take $15,000 from your IRA to meet an emergency. That $15,000 will be subject to income tax and a 10 percent penalty–and you’ll also owe $5,000 as a 10 percent penalty on your previous $50,000 of premature distributions.
Therefore, before you start a SEPP you should be aware that it’s vital to stay with the plan until you’re allowed to stop.