Your IRA funds are intended for your retirement years. To discourage the desire to tap into retirement savings early, Internal Revenue Code Section 72(t) institutes a 10 percent premature distribution tax on withdrawals made before you reach age 59½.

Now, as with most IRS rules, there are exceptions. Distributions made after your death; distributions made because of a qualifying disability; distributions for a first-time home purchase; qualifying higher education expenses and unreimbursed medical expenses all have rules that allow for penalty-free early withdrawals.

However, what if your financial circumstances change? What if you lost your job at age 50 and had to take a job that paid significantly less? What if you wanted to retire early, but all your retirement funds are in an IRA?

One of the exceptions under IRC 72(t) is for taking a series of “substantially equal periodic payments.” The payments must be for the longer of five payment years from the first distribution or until you reach age 59½. While this method bypasses the early withdrawal penalty, the withdrawals are taxed at your current income tax rate. However, this could deplete your retirement accounts well before the end of your life expectancy.

You can use any combination of IRAs by aggregating the account balances when calculating your substantially equal periodic payments. Multiple IRAs do not have to be combined, but you cannot exclude a portion of an IRA. The entire account balance must be used when calculating equal periodic payments.

To calculate the amount of your substantially equal distribution you must use one of three IRS-approved methods: the Life Expectancy Method, Amortization Method or the Annuitization Method.

The Life Expectancy method may result in slightly different payments each year, as the formula recalculates your IRA balance each year. The Amortization and Annuitization methods provide fixed distribution amounts each year. All three methods involve a reasonable determination of your account balance(s), an interest rate and a life expectancy factor, as determined by the IRS.

If your head is spinning, it should. It is very complicated. Because these calculation methods are complex, it is important to consult a financial adviser or certified public accountant. If you were to make a mistake on any withdrawal, or make what the IRS considers a “modification” to your calculation method, the IRS will assess a 10 percent penalty on all of your withdrawals.

Next week, I’ll address net unrealized appreciation, a special tax treatment for the distribution of company stock that could significantly save investors’ tax dollars.

William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.