Unlocking Your Retirement Account: Understanding Substantially Equal Periodic Payment (SEPP)

Have you reached financial independence but have continued to work until age 59.5 to avoid the 10% early withdrawal penalty? You shouldn’t feel trapped by IRS rules or accept a 10% penalty to access your hard-earned savings. Instead, consider the Substantially Equal Periodic Payment, also known as SEPP. This solution allows you to tap into your retirement funds without incurring the 10% early withdrawal penalty.

SEPP is a provision under IRS Rule 72(t) that allows you to withdraw funds from your IRA before age 59.5 without incurring the 10% early withdrawal penalty. To properly take advantage of SEPP, you must follow specific guidelines. Most important is the withdrawal decision to take equal periodic payments over a specified period, typically the greater of five years or until you reach age 59.5. There are factors that can impact the withdrawal amount you’re permitted to take each year, including: current interest rates, your spouse’s and your life expectancy, and account balance. The annual payments must be calculated based on one of three IRS-approved methods:

1. Required Minimum Distribution (RMD) or Life Expectancy Method: This method calculates payments based on your account balance, age, and life expectancy factors provided by the IRS.

2. Fixed Amortization Method: Payments are determined using a fixed interest rate and your life expectancy, resulting in equal annual payments.

3. Fixed Annuitization Method: This method calculates an annual payment by dividing the account balance by an annuity factor, also resulting in equal annual payments.

Deciding on a withdrawal method will depend on your withdrawal needs. Typically, the Fixed Amortization Method and the Fixed Annuitization Method generate larger payments than the Required Minimum Distribution (RMD) Method. The former also offers fixed annual amounts, while the latter is variable, which will change yearly. However, it is crucial to understand that SEPP is a serious financial commitment and that not following IRS requirements can result in penalties. In addition, starting SEPP doesn’t avoid income tax, as funds distributed from IRA accounts will still generate taxable income and can impact your tax situation.

Guidance from a qualified financial advisor and tax team is crucial to avoid expensive missteps. Contact Heritage Wealth Architects to guide you through the process and ensure that your decision aligns with your short-term needs and long-term goals.

Source: https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments