IRA withdrawals before age 59 1/2 usually are subject to a 10 percent penalty but Section 72(t) of the Internal Revenue Code provides some exceptions. Many people who retire in their early 50s have few investments, other than what’s in their IRAs. Until they reach 59 1/2, they may depend heavily on those 72(t) exceptions.
Among various 72(t) exceptions, withdrawals that qualify as substantially equal periodic payments (SEPPs) avoid the penalty. SEPPs must continue for five years or until 59 1/2, whichever comes later. Thus, anyone who begins at age 52 1/2 is committed to seven years of SEPPs. If you take out less than the SEPP amount-or more-you must pay penalties and interest on all the prior withdrawals.
The proper SEPP amount can be calculated in different ways:
With the life expectancy method the SEPP is recalculated each year, using a shorter life expectancy. This method results in a relatively small SEPP.
If you want to maximize withdrawals you can use the amortization or annuitization methods. These methods might allow someone in his early 50s to withdraw 7 percent or more of an IRA each year, penalty-free.
