Many people are opposed to paying the penalty tax for early distributions and ask the question, “Is there a way to avoid it?” Yes, there is: the Safe Harbor distribution methods. Following the rules of the Safe Harbor distribution methods is one of the exceptions for the 10% early distribution penalty. There are three methods that qualify as a Safe Harbor method:

1. Life expectancy method is calculated the same way as Required Minimum Distributions (RMD), but it simply starts at a younger age. It’s a variable annual payment that fluctuates with the account balance each year. It is usually the smallest initial annual payment and the annual payment may increase or decrease if the account earns more (or less) interest than assumed in the projected calculations.
2. Amortization Method is a level annual payment amortized over life expectancy that, once calculated, the distribution remains the same each year. It is usually a lower annual payment and slower spend-down of the account, and there are more choices for life expectancy calculation.
3. Annuity Method is very similar to the amortization method but it uses a level annual payment based on the life only annuity tables. It is usually the highest annual payment and fastest spend-down of the account. It is the least flexible method.