Penalty Free Withdrawals

It is a generally believed fact that if you are taking withdrawal from tax-deferred retirement account before age 59½ then you will be required to pay 10% penalty. But for the convenience of the customer several exceptions are also available which allows you to withdraw money without owing the penalty.
Confusing enough, the list of exceptions for IRAs and SEPs isn't identical to the list for qualified retirement plan accounts. One exception available for all types of accounts is taking annuity-like withdrawals over your life expectancy. It is also called annualizing. The annuity-like-withdrawals must be taken at least annually.

Their is one alternative exception available for all types of accounts. It is taking annuity-like withdrawals over your life expectancy. This is known as the term "annuitization" of the account. The annuitant can also use the annuity calculator to know about the amount of penalty-free that he/she can withdraw from a tax-deferred account. The annuity-like withdrawals must be taken at least once a year.

If you have many tax-sheltered accounts then you can annuitise one or more accounts and leave the rest alone. But you should first make sure that account or accounts you chose should supply the needed cash flow after being annuitized. Once you start taking annuity-like-withdrawal then you must continue the withdrawal for 5 years or until the age of 59½ whichever comes first.

Such withdrawals trigger income tax payment as well. So it is highly recommended that one should never annuitise the account for short term cash problem or needs, because annuitization locks you into paying income taxes for a long time.

If still one prefer to take withdrawals that differ from regular annuity amounts, than it could lead to serious consequences like