There is a way to take distributions from an IRA prior to age 59 ½ without a 10% penalty from the IRS. It’s called a 72(t) Distribution. The 72(t) Early Distribution Illustration helps you explore your options for taking IRA distributions before age 59½ without incurring the IRS 10% early distribution penalty.
Internal Revenue Code (IRC) Section 72(t)(2)(A)(iv) defines these distributions as "Substantially Equal Periodic Payments". The IRS has approved three ways to calculate your distribution amount: annuitization, amortization, and required minimum distribution.
You can choose any of the three methods on which to base your distribution amount. To avoid the 10% penalty once you begin distributions, you must continue to take the required distribution using the same method, at least annually, for the longer of five years, or until age 59½.
Once distributions begin, if the series of payments is modified in any way, the 10% early distribution penalty will be imposed retroactively beginning with the first year of distribution.
Exception: There is a five-year rule that is waived upon death or disability of the IRA owner. It is also waived for IRA owners who make a one-time change from the amortization or annuitization methods to the required minimum distribution method.
The IRS limits how much can be withdrawn by assuming any future earnings will be at most 120% of the Federal Mid-Term.
This method can help assure that you will not prematurely deplete your retirement account. However, if you have a higher rate of return your account can grow, even though you have taken distributions.
On the other hand, if you incur losses your account balance could end up shrinking faster than you might expect.