Unsuspecting IRA savers have recently suffered some big losses by following the advice of their brokers. Avoid the same fate by knowing the rules about early IRA withdrawals.

In life, there are high roads and low ones. While some folks may try to tell you that there are shortcuts as well, cutting corners in personal finance is never a reliable way to get ahead-particularly when your retirement funds are at stake.

No shortcuts

Citigroup Group Global Markets brokers are in hot water. It seems that these brokers were making some aggressive recommendations to their clientele regarding SEPPs, also known as substantially equal periodic payments. SEPPs are penalty-free, early withdrawals taken from IRA accounts, provided for by IRS Code Section 72(t).

The SEPP regulation acknowledges that, in some emergency situations, accountholders may need to access their retirement funds before the age of 59 . Citigroup brokers, however, characterized the SEPP regulation as a loophole that allowed accountholders to retire early. Clients who followed that strategy watched their account balances drop by a total of more than $12 million. Citibank now faces lawsuit settlement charges of more than $15 million.

Play by the rules

If someone has recommended a SEPP to you, make sure that you know the rules and risks before proceeding.

A compliant SEPP program allows you to avoid the 10 percent penalty tax associated with early IRA withdrawals. Once the SEPP is established, however, it must continue for at least five years, or until six months after your 59th birthday-whichever occurs later. Further, the SEPP withdrawal amounts must be calculated in one of three methods-fixed amortization, fixed annuitization, or required minimum distribution:

• Fixed amortization: The annual distribution amount is calculated by using a projected life expectancy, so that the funds will, in theory, last as long as you do.
• Fixed annuitization: The annual distribution amount is calculated using the account balance and an annuity factor based on your age and life expectancy.
• Required minimum distribution: Annual distribution amounts are equal to your account balance divided by your life expectancy. Payments are recalculated annually.

Any small change in the SEPP structure could trigger the 10 percent penalty, as well as related interest charges. You're allowed to switch once from a fixed payment to required minimum distributions. But you can't switch from required minimum distributions to a fixed method.

Even if you feel comfortable following the SEPP rules, you still need to consider what you're giving up. Taking five or more years of IRA distributions also means foregoing years of earnings potential as well as tax advantages on those funds. If you really need the money, it may be cheaper to take one withdrawal and accept the 10 percent penalty. Trying to take the SEPP shortcut to retirement may loop you right back into the world of the working. Consult with a tax attorney and advisor who specialize in personal finance before deciding to tap your retirement funds.