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If you own an Individual Retirement Account (IRA), the primary purpose is to accumulate assets to provide an income source during retirement. In the accumulation phase, you may contribute to an IRA on a tax deductible basis (with some exceptions) with the earnings growing tax deferred. Upon withdrawal, distributions will be included in income and taxed accordingly. In addition, for those wishing to access their IRAs *early,* distributions prior to age 59 * will be subject to a 10% premature distribution penalty tax, unless an exception applies.

You may have thought that there is no way to withdraw funds from your IRA *early*, before age 59 *, and avoid the 10% penalty. This is not true. The IRS permits an individual, under the age to 59 *, to make distributions from their IRA and avoid the 10% early withdrawal penalty if the distributions are due to one of the IRS exceptions, one of which is a series of substantially equal periodic payments. As you may have guessed, there are several requirements that apply when claiming the substantially equal payment exception.

For example, once distributions are deemed to have begun from the IRA under the substantially equal payment exception, the payments must continue at least annually, unmodified, for the longer of five years or until the IRA participant reaches age 59 *. In other words, if a 50 year old IRA participant begins distributions under this exception, distributions must continue until the individual attains age 59 * before the amount could be modified. On the other hand, if a 58 year old IRA participant begins distributions under this exception, distributions must continue until the individual attains age 62 before the amount could be modified.

The amount that can be withdrawn each year is calculated by using one of three IRS approved methods: annuity, amortization and life expectancy. The variables included in the calculation are the individual's age, the IRA account value and a *reasonable* interest rate. Each method will allow a different amount to be withdrawn from your IRA and most individuals simply choose the method allowing for the distribution amount closest to what they need. Generally, a tax or financial advisor with the use of software can perform these calculations for you.

The substantially equal payment exception does allow for you to access your IRA *early* but is it the best alternative? It is important to note that if the payment amount is modified before the later of five years or attainment of age 59 *, a 10% penalty will be applied retroactively to all current and previous distributions intended to qualify under the substantially equal payment exception. Before electing substantially equal payments from the IRA, ask yourself, will I be able to maintain the amount withdrawn for the necessary time period? Consider the use of this method in difficult financial times. If you have been temporarily unemployed, the amount of the payment may not be sufficient to sustain your lifestyle during a prolonged work stoppage. Individuals applying this strategy have been known to dip back into the IRA for more money, thus modifying the payment schedule and subjecting all distributions to the retroactive 10% penalty.

This article illustrates just a few of the many issues to consider before beginning a series of substantially equal payments from your IRA. These issues and alternative solutions should be carefully examined with your financial advisor or tax professional before making any decisions.