What Is a Substantial꧂ly Equal Periodic Payment (SEPP)?

A substantially equal periodic payment (SEPP) is a penalty-free withdrawal made from a retirement savings account before you turn 59½. A SEPP is one of the exceptions made to the age-related withdrawal rules set up under the Internal Revenue Code (IRC). Penalty-free withdrawals from SEPP plans are made through specified annual distributions for five years or until the account holder turns 59½, whichever comes later. Income tax must still be paid on the withdrawals.

How Substantially Equal Periodic Payment (SEPP) Plans Woꦆrk

Early withdrawals from a retirement savings account incur a 10% penalty. The exception is having a SEPP plan. You can use any pre-tax qualified retirement account with a SEPP plan, such as a traditional individual retirement account (IRA) or a 401(k). The SEPP arrangꦍement can be set up through a financial advisor or directly with a financial institution.

You must choose among three 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS)-approved methods for calculating your distributions from a SEPP when you set up the account🤪:

• 澳洲幸运5官方开奖结果体彩网:Amortization
• 澳洲幸运5官方开奖结果体彩网:Annuitization
• 澳洲幸运5官方开奖结果体彩网:Required minimum di😼stribution (RMD)

Each results in a different calculated annual distribution. The amount you withdraw is pre-determined and unchanged every year, at least with two of the three options.

The IRS advises individuals to select the method that best supports their financial situations. But, you can change the method you use once within the lifetime of the plan. Should you cancel the plan before the minimum 澳洲幸运5官方开奖结果体彩网:holding period expires, you will have to pay the IRS all penalties it waived on the plan's distributions, plus interest.

How to Calculate SEPP Plan Withdrawals

There are three different methods approved by🅺 the IRS to determine withdrawals from your SEPP plan. We discuss them below in a little more detail.

Amortization Method

Under the amortization method for calculating the SEPP plan's withdrawals, the annual payment is the same for each year of the program. It's determined by using your life expectancy or that of your beneficiary (if applicable) and a chosen interest rate of not more than 120% of the federal mid-term rate, according to the IRS.

Annuatization Method

As with the amortization method, the distribution you must take under the 澳洲幸运5官方开奖结果体彩网:annuitization method is also the same each year. The amount is determined by using an annuity based on your age, your beneficiary's age (if applicable), and a chosen interest rate with the same IRS guidelines as with amortization. The annuity factor is derived using an IRS-provided 澳洲幸运5官方开奖结果体彩网:mortality table.

Required Minimum Distribution (RMD) and SEPP

Using the RMD method, the annual payment is determined by dividing the 澳洲幸运5官方开奖结果体彩网:account balance by the life expectancy factor of you and your beneficiary, if applicable. Under this method, the annual amount must be recalculated annually and, as a result, will change from year to year. It also generally results in lower annual withdrawals than the other 🦋methods.

Advantages and Disadvantages of SEPP Plans

Advantages

Using a SEPP plan can be a boon to those who wish or need to tap into retirement funds early. It provides you with a steady stream of income, penalty-free, inꩲ your 40s or 50s to help tide you over between the end of a career (and a regular paycheck) and the arrival of other retirement income.

At 59½, you can withdraw additional funds from your retirement accounts without penalty. By your late-60s, you'll qualify for full benefits from 澳洲幸运5官方开奖结果体彩网:Social Security and perhaps a defined-benefit pension.

The restrictions for SEPP stay in place until the payment term ends, which is the latter of five years or when you reach turn 59½. For example, an IRA owner who took SEPPs at 40 would have to abide by the restrictions for almost 20 years. On the other hand, an IRA owner who begins SEPPs at age 58 would only have to continue until 63. These five years are measured from the date of the first 澳洲幸运5官方开奖结果体彩网:distribution and end exactly five years from that date. It does not end after the fifth distribution is made.

Disadvantages

One of the drawbacks of the SEPP program is that it is relatively inflexible. Once you begi♛n a ꧂SEPP plan, you must stay with it for the duration. This can potentially be decades if you begin the plan in your 30s or 40s.

You have little to no leeway to alter the amount you can withdraw from the fund each year and quitting the plan is hardly an option. That's because it imposes all the penalties you saved from launching it plus interest. The same sanction may also apply should you miscalculate and fail to make the necessary 澳洲幸运5官方开奖结果体彩网:withdrawals within any one year.

Starting a SEPP also has implications for your financial security later in retirement. Once you start a SEPP, you'll have to stop contributing to the associated retirement account. This means the balance can't grow through further contributions. By withdrawing funds early, you also forego the earnings along with the tax you'll save on those gains, which will compound tax-free within the account.

The Bottom Line

There are rules in place to protect your retirement nest egg until you need it the most. As such, you can't make early withdrawals from your accounts without incurring penalties. But there are exceptions. SEPP programs allow you to use your retirement accounts if an exceptional circumstance arises, such as an illness. But certain rules apply. The IRS has certain calculation methods you must use to determine your distributions and you must take these payments for a certain length of time. If you're unsure of how the program works or if it's right for you, consult a financial or retirement specialist.