At age 62, you can begin to collect Social Security checks. However, many early retirees, among other people, need money sooner — perhaps much sooner. They therefore need to tap their IRAs for living expenses because after they stop working, they have less income than they did during the years they were earning paychecks.

Upside: Because of their lower income, early retirees may be in a lower tax bracket than before. This will reduce the income tax they’ll owe on IRA withdrawals.

Trap: Before age 59½, IRA withdrawals generally are subject to a 10% surtax.

Example: James Green, age 50, retires and finds himself in the 25% federal income tax bracket this year. He takes a $25,000 distribution from his IRA for living expenses.

On that withdrawal, he owes $6,250 in federal income tax (25% of $25,000). But he also owes a $2,500 surtax (10% of $25,000).

The extra tax effectively pushes this moderate-income retiree into the top 35% federal income tax bracket.


Section 72(t) of the Tax Code includes several exceptions to the 10% surtax.

Examples: After an IRA owner’s death, a young beneficiary may take distributions from the decedent’s account without owing the surtax. Similarly, if you are disabled and can’t be expected to earn income for many years, the surtax won’t apply.

As you can see, such exceptions might not help many early retirees.

What you can use: Most early retirees wishing to tap an IRA focus on one of the other exceptions listed in Section 72(t) — the option to take “substantially equal periodic payments” (SEPPs) from their IRAs. Such payments can provide a stream of IRA withdrawals, penalty free. What’s more, you have a great deal of flexibility in structuring these payments to meet your needs.


SEPPs must be calculated in accordance with your life expectancy, from an IRS table. To find the Single Life Expectancy Table for Inherited IRAs, go to, then click on “Consumers” and “Single Life Table for Beneficiaries.”

Example: James Green is 50, as mentioned. His life expectancy is 34.2 years. Thus, he can use a 34.2-year schedule for tapping his IRA, penalty free.

Loophole: James does not have to maintain SEPPs for 34.2 years in order to avoid the 10% surtax.

Required: Taxpayers must maintain SEPPs for at least five years. If SEPPs are started before age 54½, they must be continued for more than five years — at least until age 59½.

Trap: If you fail to complete the required SEPP schedule, you’ll owe the 10% surtax on all the withdrawals you’ve taken, plus interest. This is true if you deviate from the schedule by any amount.

Important: You’ll also owe the surtax if you make more contributions to this IRA while taking the scheduled SEPPs. (Reinvestment of earnings within the IRA is allowed.) You are allowed to make contributions to another IRA.


The Tax Code specifies three methods of taking SEPPs…

Minimum distribution. Official life expectancies usually go down by 0.9 every year, therefore, James can take 1/34.2 of his IRA balance in year one, 1/33.3 of the balance in year two, etc.

This method might make sense if you need to withdraw a relatively small amount from your IRA. If you are married, you can use a joint life expectancy with your spouse and thus withdraw even smaller amounts each year.

Amortization and annuitization methods. With both of these methods, you assume that your IRA will grow during your lifetime at a rate that you specify. (IRS regulations cap the amount you can assume.) This assumed growth allows you to take out more from your IRA each year, penalty free, than you can take out if you use the minimum distribution method. (You use these methods for five years or until age 59½, whichever comes later.)

Amortization: Most people using SEPPs choose this method. Payments under the amortization method are fixed, based on the amount determined when the SEPP is first calculated. A calculation under this method requires that the account balance be amortized (paid in installments) over the individual’s single, joint, or uniform life expectancy. (Uniform life expectancy is used when you name a beneficiary who is 10 or more years younger than you are.) The amount is calculated using the earnings rate chosen by the individual. This typically permits slightly higher penalty-free withdrawals than the annuitization method (see below) and much higher withdrawals than the minimum distribution method.

Example: Using current interest rates, 50-year-old James would be able to withdraw $14,620 this year, penalty free, from a $500,000 IRA, using the minimum distribution method. With the amortization method, James could withdraw approximately $30,800 (depending on interest rates used) each year, penalty free, until age 59½.

Annuitization: The annual payment for each year is determined by dividing the account balance by a factor based on the age of the individual, and continuing for the life of the taxpayer (or the joint lives of the individual and beneficiary). The annuity factor is derived using the mortality table labeled “Appendix B” in Revenue Ruling 2002-62, along with the interest rate chosen by the taxpayer.

The annuitization method would allow James to withdraw $30,400 per year over five or more years penalty free.

These calculations are complex, so it’s best to work with a tax CPA, enrolled actuary, or tax attorney to come up with the permitted amount. Keep good records to demonstrate compliance in case your tax return is examined.


If James wants to withdraw $30,800 from his IRA each year, he can simply apply the amortization method to his $500,000 IRA. Real life is seldom this simple, though.

Example: James had $520,000 in his IRA as of December 31, 2007. In 2008 and succeeding years, he would like to withdraw only $25,000 per year from his IRA.

James determines that using the amortization method and current interest rates, he can withdraw $25,000 a year from a $406,000 IRA.

How this is possible: James divides his $520,000 IRA into one $406,000 IRA and one $114,000 IRA. Then, he takes SEPPs of $25,000 a year from the $406,000 IRA.

The $114,000 IRA is not affected by his scheduled withdrawals. If James decides to make an IRA contribution during the SEPP period, that contribution can go into the $114,000 IRA.


Many things can happen during the period when you are taking SEPPs…

You need more money. You may discover that your $25,000 annual SEPP withdrawals are inadequate. However, if you take larger withdrawals from the IRA connected to your SEPPs, you will owe a 10% surtax, plus interest, on all previous IRA withdrawals.

Instead, you can tap another IRA for the extra cash. If you’re under age 59½, you’ll owe a 10% penalty on these withdrawals — but to avoid that, you can start a new series of SEPPs from this other IRA.

You need less money. You may go back to work or come into an inheritance. Then you won’t need the $25,000 IRA withdrawals.

However, if you stop taking the SEPPs prematurely, you’ll owe penalties and interest.

Strategy: In Revenue Ruling 2002-62, the IRS announced that taxpayers in the midst of SEPPs can make a onetime switch from the amortization method or the annuitization method to the minimum distribution method.

This would allow you to take out much smaller amounts each year, thus leaving more money in your IRA for ongoing tax deferral. No penalties would be due.