The IRS recently issued updated guidance (Notice 2022-06) on whether a series of payments from certain tax-favored retirement plans and nonqualified annuities are considered a series of “substantially equal periodic payments” and exempt from early withdrawal penalties.
Section 72(t) generally imposes an additional 10% income tax on early withdrawals from tax-favored accounts such as Section 401(k) accounts, Section 403(b) plans, and individual retirements accounts—generally defined as withdrawals occurring before the participant reaches 59-1/2 years of age.
There are numerous exceptions to the additional 10% tax on early withdrawals, including an exception for distributions that are part of a series of “substantially equal periodic payments” made for the life or life expectancy of the participant, or the joint lives or joint life expectancies of the participant and designated beneficiary. However, if this exception applies and the series of payments is subsequently modified (other than by reason of death, disability, or a distribution to a public safety employee in a governmental plan) before the end of the five-year period beginning on the date of the first payment, or before the plan participant attains age 59-1/2, the 10% additional tax that would have been imposed is recaptured—plus interest for the deferral period.
The guidance in the notice replaces the guidance in Rev. Rul. 2002-62 and Notice 2004-15 for any series of payments commencing on or after Jan. 1, 2023, and it may be used for a series of payments commencing in 2022.
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