IRS Updates Safe Harbor Methods For "Substantially Equal Periodic Payment" Exception

Recent IRS Notice 2022-6 updates longstanding guidance on when a series of payments from an individual account under a tax-favored retirement plan is considered a series of "substantially equal periodic payments". Under Code Section 72(t), taxpayers who choose to make an early withdrawal (which generally applies to withdrawals before age 59½) from their IRA, 403(b), or qualified plan may be subject to an additional 10% income tax on the amount distributed. However, Section 72(t)(2)(A)(iv) exempts distributions that are part of a series of "substantially equal periodic payments" over the taxpayer's life expectancy (or joint life expectancy with a beneficiary).

We summarize the new guidance (which also applies to nonqualified annuities under section 72(q)) below.