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Investing Basics

December 2014 - Substantially Equal Periodic Payments from Your IRA

Are you thinking about retiring before you reach age 59½? Will you need to make withdrawals from your traditional IRA to cover your expenses? If so, you may be wondering if you can avoid the 10% federal early withdrawal penalty. By using substantially equal periodic payments (SEPPs), you can begin taking IRA withdrawals before you reach age 59½ and avoid the early withdrawal penalty. While withdrawals made using this method are exempt from a penalty, federal and state tax may still apply.

If you begin taking SEPPs, you will be required to take annual distributions from your IRA for the longer of 5 years or until you have reached the age of 59½. For example, if you begin SEPPs at age 52, they must continue for 7.5 years, until you reach age 59½. If you begin at age 56, they must continue for five years, until you reach age 61.

There are three IRS-approved methods you can use to calculate your SEPP amount: the required minimum distribution method, the fixed amortization method and the fixed annuitization method. If you choose the easiest option, the required minimum distribution method, SECU can assist you in calculating the SEPP amount each year. The payment amount is determined by dividing the account balance by the life expectancy factor for your age from one of the tables in IRS Publication 590. Generally, if you alter or stop these payments before the deadline, you would trigger a retroactive 10% federal penalty, plus interest, for all SEPP distributions. To ensure you are compliant, an automatic distribution can be set up from your IRA to your SECU deposit account.

More information regarding substantially equal periodic payments can be found in IRS Publication 590. If you are ready to establish recurring distributions under the substantially equal periodic payments early withdrawal penalty exception, contact your local branch or the SECU Contact Center at 888-732-8562.

Investment advisory services offered to North Carolina residents through Credit Union Investment Services. Securities offered through SECU Brokerage Services. Member FINRA, SIPC. Securities products are not credit union deposits. They are not obligations of or guaranteed by a credit union or its affiliates. They are not insured by the NCUA or any federal government agency. Securities products involve investment risks, including possible loss of principal. Investment representatives are also credit union employees, who may accept deposits.

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