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Posted by Dennis Jao

New IRS Rules on IRAs: What You Need to Know Now

New IRS Rules on IRAs: What You Need to Know Now

There's a new guide to early IRA retirement that pre-retirees need to know. It changes the interest rate on early withdrawals and allows you to switch methods. IRAs are great planning tools that allow you to create deferred or tax-deferred retirement funds or a tax-free basis in the case of Roth IRA. With the "Great Resignation" up and running, many are wondering when they can withdraw money from their IRAs as a transfer to their 401(k), 403(b), or 401(a) plans without receiving a penalty.

The basic rules

There are two key or "target" dates for traditional (non-Roth) IRA withdrawals: age 59.5 and age 72. Between the ages of 59.5 and 72, an IRA owner can get anything they want from the IRA. When they make a withdrawal, it's taxable income. Of course, withdrawals would interact with the IRA owner's circumstances, such as other income, tax, and cash flow needs. Before age 59.5, withdrawal may incur an additional 10% early withdrawal tax unless there are specific exceptions, which we will discuss later. The required minimum distribution (RMD) must begin at age 72 (effectively April 1 of the year following the birthday). Ignoring an RMD can result in a 50% penalty, so IRA owners should be careful when taking their RMD.

Early Distributions

There is an additional 10% fee for distributing traditional IRAs before age 59½.

Among these exceptions, the IRA recently guided the "substantially equal regular payments" (SEPP) method, which allows the IRA to be distributed at any age.


The early withdrawal loophole. Section 72(t) of the IRS Code allows for an exemption from the 10% penalty if a participant receives a substantially equal series of periodic payments from their plan or IRA. The rules are precise, and a 72(t) must be carefully calculated. Making a 72(t) election is also a decision for the greater of 5 years or age 59½ (with some respite from the new rules). Therefore, a 55-year-old man should maintain 72(t) until age 60.

In Notification 2022-06, the IRS established new SEPP guidelines for any series of payments beginning January 1, 2023, or beginning in 2022. The notification allows persons subject to a prior SEPP calculation to use the new tables and standards.

Three methods of SEPP

There are three ways to use the SEPP exclusion:

  • The RMD method takes the account balance at the end of the previous year and divides it by the life expectancy in the IRS table with life expectancy. With this method, the payout starts small and changes with the account balance and the age of the IRA owner.

  • The fixed amortization method calculates the lifetime payment from the IRS tables at an IRS-approved interest rate. If this method is chosen, the payment remains the same.

  • The fixed annuity method divides the account balance by an annuity factor based on age and IRS-approved interest rates. With this method, the payment remains the same.

Under the old 2021 rules, a 56-year-old man with $500,000 in the IRA could receive $17,921 a year with the RMD method, $22,123 with the fixed amortization method, and $21,997 under the fixed annuity method. They would use the old IRS tables and the low federal rate of 1.52%.

What's new? A major change in the SEPP rules is the change in the interest rate used. Under the previous rules, it had to use 120% of the federal mid-term rate (1.52% in December 2021). With the new rules, it is possible to use a rate not exceeding the greater of:

• 5% or

• 120% of the Federal Mid-Term Rate

That makes a big difference in today's low-rate environment. The 5% tax, when applied to the 2021 mortality tables, the example above, would increase the annual allowable withdrawal to $33,180 with the fixed amortization method and $32,862 with the fixed annuity method. (Note that this example uses mortality tables from 2021.)

The notification allows an employee to make a single method change and recalculate the new SEPP without penalty. This can be advantageous if someone taking SEPP wants to change their withdrawal.

More IRAs

Note that the SEPP applies to each account. The SEPP "switch" must be activated for 5 years or until the age of 59½, whichever is greater, so the use of multiple IRAs may allow the flexibility to perform another SEPP later or wait until after age 59½. In our example above, the 56-year-old man might only need $24,000 a year, so he could distribute about $361,663 into an IRA and reduce his SEPP to 5%, leaving the rest to grow later.


Early withdrawals just got a little easier from the IRS, and we have some flexibility in determining when and how to make tax-free early distributions.



Dennis Jao
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