For those persons who wish to withdraw funds early (prior to 59 1/2) from an IRA or 403(b), this can be accomplished penalty-free using Substantially Equal Periodic Payments (SEPP). These series of payments must not be less frequently than annually.

Payments received in this matter may not be subject to the 10% Premature Distribution penalty, however will be included in the gross income by the payee, unless the amount is a tax-free recovery of non-deductible contributions. Once contributions are started, they may not be changed. You must take these withdrawals for a minimum of five years, and until you have attained the age of 59-1/2.

The rules for 72(t) distributions require that you receive the Substantially Equal Periodic Payments based upon your life expectancy. The payment amount must be calculated by one of the methods approved by the IRS.

The three methods by which the substantially equal periodic payments can be calculated are described more fully in IRS Notice 89-25.

• The life expectancy method. SEPPs calculated under the minimum distribution rules;
• The amortization method. Amortize the account balance using life expectancies and a reasonable rate of interest.
• The annuitization method. Divide the account balance by an annuity factor, using both a reasonable interest rate and mortality table.