Under the substantially equal periodic payment (SEPP) exception, the account owner must withdraw a substantially equal amount from an IRA annually for five years or until the taxpayer reaches age 59½. The amount that must be withdrawn is based on the taxpayer’s life expectancy. You must take at least one per year for five years, or until you turn 59 ½. If you miss even a single payment, you’ll owe the IRS early withdrawal penalties on all funds you’ve already taken out under your SEPP plan.
Three safe-harbor methods are available for calculating the annual withdrawal amount: (1) the required minimum distribution method, (2) the fixed amortization method, and (3) the fixed annuitization method. Each method produces a different annual withdrawal amount. Notice 2022-6 lists three methods the taxpayer may use in determining payments under a SEPP.
Modification or termination of the SEPP before the end of the required time period results in a retroactive application of the 10% penalty to all previous withdrawals and interest charges from the date each withdrawal was received until the modification or termination occurred.
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