Here's an example provided by the IRS:
Bob, age 50, is the owner of an IRA from which he would like to start taking distributions beginning in 2011. He would like to avoid the §72(t) additional 10% tax imposed on early distributions by taking advantage of the substantially-equal-periodic-payment exception.
- Bob’s IRA account balance is $400,000 as of December 31, 2010 (the last valuation prior to the first distribution)
- 120% of the applicable federal mid-term rate is assumed to be 2.98%, and this will be the interest rate Bob uses under the amortization and annuitization methods
- Bob will determine distributions over his own life expectancy only
Fixed amortization methodThe fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life uniform life or joint life and last survivor) and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
For 2011, the annual distribution amount is calculated by amortizing the account balance ($400,000) over a number of years equal to Bob’s single life expectancy (34.2) (obtained from Q&A-1 of I.T. Regs. §1.401(a)(9)-9 using age 50), at a 2.98% interest rate (April 2011 rates). The annual distribution amount is $18,811.
Fixed annuitization methodThe fixed annuitization method consists of an account balance, an annuity factor and an annual payment. The annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
Under this method the annual distribution amount is equal to the account balance ($400,000) divided by an annuity factor that would provide one dollar per year over Bob’s life, beginning at age 50. The age 50 annuity factor (21.345) is calculated based on the Rev. Rul. 2002-62 Appendix B mortality table and an interest rate of 2.98%. The annual distribution amount is calculated as $400,000/21.345 = $18,740.
Source:
http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments (This is the answer to "How are payments determined under the three methods?")