## Avoiding The IRA Early Withdrawal Penalty With Equal Periodic Distributions

An early withdrawal from most types of retirement accounts usually results in a tax penalty. However, there are several penalty exceptions. IRA owners may avoid the penalty on early withdrawals by planning ahead to take equal distributions over the course of several years.

A short actuarial calculation is necessary to determine the amount to distribute each year to avoid the penalty. An additional form is then filed with your income tax return each year to report that the distribution is eligible for a penalty exception.

**Annuity similarities**

An IRS life expectancy table is used to calculate the specific amount that must be withdrawn from your IRA each year. The series of equal payments must continue at least until you reach age 59 1/2. The payments must last for a duration of at least five years. If you are within five years of age 59 1/2, the 5-year time requirement is likely to extend the distribution period beyond the date you reach age 59 1/2.

There are three IRS-approved methods of calculating a series of equal IRA distributions based on age. The most straightforward method essentially entails dividing the IRA account balance by your life expectancy. The other methods require the inclusion of an interest rate in the calculation. The simpler technique that requires no interest rate factor is referred to as the required minimum distribution method.

**Life expectancy tables**

It is quite appropriate that the required minimum distribution method is titled as such. The life expectancy tables used for the calculation are the same tables used by retirees to calculate their required minimum distribution from an IRA at age 70 1/2. However, for an early IRA withdrawal, the table determines a precise amount rather than a minimum threshold. The tables are published in IRS Publication 590.

**Uniform Lifetime Table**

There is one other actuarial table that can be used instead of the tables in Publication 590. The Uniform Lifetime Table is available online in an IRS bulletin. Regardless of which table is selected, the table age to use is your age on your birthday during the year, not your age at the end of a year.

Even though the annual distributions are described as equal, they may change somewhat from year to year due to account earnings. The annual distribution requirement can be divided and taken on a monthly basis. If the time and age requirements are not both met, all of the prior IRA distributions are deemed to be early distributions and are subject to the penalty.

IRS Form 5329 is filed each year to report the amount of the IRA distribution, along with a specific code to indicate the specific penalty exception. Contact a financial planner, like one at Family Focus Financial Group, for more information on IRA planning.