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What are the requirements of substantially equal periodic payments to avoid the IRS early distribution penalty of 10%?

IRA owners can receive distributions from their traditional IRA before age 59½ if they are part of a series of substantially equal payments over the owner’s life (or their life expectancy), or over the lives (or the joint life expectancies) of the owner and their beneficiary, without having to pay the 10% additional tax (also known as the IRS early distribution penalty).

To qualify for this exception to the early distribution penalty, the owner must distribute a specific amount annually for a period of 5 years or until the owner attains age 59½ (whichever is later). The IRS provides three general methods of computing the annual distribution amounts for meeting the requirements for a series of substantially equal periodic payments: Notice 2022-06 explains the three methods and identifies tables to be used for 2023 and after. (See Notice 2022-06).

The three methods are generally referred to as the required minimum distribution method (RMD method), the fixed amortization method, and the fixed annuitization method. The latter two methods may require professional assistance.

  • RMD method – based on life expectancy using IRS tables (calculated similar to an owner’s RMD when they attain age 73 or older)
  • Fixed amortization method – payments are calculated based on a fixed amortization schedule over the life expectancy of the account owner
  • Fixed annuitization method – payments are calculated using an annuity factor from a reasonable mortality table.

Once the series of substantially equal periodic payments has been established, it must remain unchanged for the duration of the payment requirement. Modification will occur if there is

  • any addition to the account balance other than gains of losses,
  • any nontaxable transfer of a portion of the account balance to another retirement plan, or
  • a rollover by the owner of the substantially equal payment amount received in the series.

If the series is modified (for reasons other than death or disability) before the owner attains age 59½ or the 5th anniversary of the date of the first distribution in the series (whichever is later) the IRA owner is subject to a recapture tax. The recapture tax is imposed in the tax year the payments are modified and is equal to the amount of the 10% early distribution penalty that would have been imposed in prior years had the exception not applied in those prior years, plus interest for the deferral periods.

Owners can make a one-time switch from the fixed amortization method or fixed annuitization method to the RMD method without incurring the recapture tax. Once a change is made, owners must follow the RMD method in all subsequent years.

Once the owner attains age 59½ or meets the 5th anniversary of the date of the first distribution (whichever is later), the series is complete and no further distributions are required.

For additional information about substantially equal periodic payments (including examples of the calculation methods) refer to the following IRS resources: