Your Money. Your Terms – How to Avoid Paying the 10% Penalty on Retirement Savings Withdrawals – Using Substantially Equal Periodic Payments

Continuing in our series on exceptions to the 10% withdrawal penalty, we identify series of substantially equal payments (SEPP).

How It Works

If distributions are made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary, the early withdrawal penalty may not apply.

If these distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply. The IRS requires you to continue the SEPP program for the longer of five years or, until you are 59 1/2, afterwards, you may change the payment amount or stop withdrawing entirely.
The IRS allows you to calculate SEPPs using any of three approved methods. The amount of your payments will depend on your calculation method, your age, the life expectancy table you use, and (if you use one of the fixed payment methods) an interest rate based on applicable federal rates. Once you begin taking SEPPs, you must receive at least one payment a year.

IRS Approved Calculation Methods

Required minimum distribution (RMD)

• Generally receive the smallest annual amount of the three methods.
• Receive an amount that fluctuates annually.
• The easiest calculation—but you’ll need to recalculate your payment each year.

Fixed amortization

• Generally receive a larger annual amount than with the RMD method.
• Receive a fixed amount each year.
• The most complex calculation—but you’ll only need to calculate your payments once.

Fixed annuity

• Generally receive a larger annual amount than with the RMD method.
• Receive a fixed amount each year.
• Perform the calculation only once

You may use the following calculator to help you project how taking your distribution in the form of Substantially Equal Periodic Payments will impact your retirement income:

72(t) Distribution Impact Calculator (Click Here)

Distributions are reported to the IRS on Form 1099-R, but won’t indicate whether your distribution qualified for an exception to the 10% penalty rule. You must claim the exception yourself by filing IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your tax return.