By using a series of substantially equally periodic payments (SOSEPP), you can avoid the 10 percent penalty on IRA withdrawals before age 59 1/2. Although an “annual recalculation” method is not specifically permitted, the IRS has allowed its use in several private letter rulings. To use annual recalculation:
* Start with the amortization method. That method is specifically permitted and it usually leads to relatively large penalty-free withdrawals.
* Re-determine the penalty-free withdrawal amount each year.
The IRA amount, the IRA owner’s new life expectancy, and the interest rate must be re-set each year, on the same date.
Bull market: If the IRA balance grows, an early retiree can get more spending money, penalty-free.
Bear market: The value of an IRA probably will decline. If the IRA is smaller, so will the required payout, preventing depletion of the account.
You may feel more comfortable requesting a private ruling from the IRS before starting the process, to avoid future tax problems.
