Substantially Equal Periodic Payment, or SEPP, is a method of distributing funds from an IRA or other qualified retirement plans prior to the age of 59½ that avoids incurring IRS penalties for the withdrawals.
SEPP Calculation
The annual payment is calculated based on a period equal to the owner's life or life expectancy, or the joint lives or joint life expectancy of the owner and his or her designated beneficiary.
Taxes on SEPP Withdrawals
SEPP withdrawals are taxed, and if you withdraw early from a Roth IRA under an SEPP plan, you'll be taxed on those distributions as well.
Internal Revenue Code section 72(t) allows penalty-free1 access to assets in IRAs and employer-sponsored retirement plans under certain conditions, such as account holder death or disability, first-time home purchases, and taking substantially equal periodic payments (SEPP).
SEPPs can be an effective way to access retirement funds early, especially if you've lost your job and/or are approaching retirement age. However, this type of distribution can be complicated and may require the help of a financial advisor.
Jim Barnash, CFP
SEPP, which stands for substantially equal periodic payments, is a little-known program that can enable you to withdraw money from your IRA or 401(k) before age 59.5 without facing an early withdrawal penalty.
Simply put, 72t is an IRS rule that lets you withdraw money from your retirement accounts before age 59-½ without incurring a 10 percent penalty. It's called “72t” because of its location in the IRS code. Anyone can use rule 72t to tap into retirement funds, but there's one catch.
SEPPs are substantially equal periodic payments. When you withdraw money from a qualified retirement account under Rule 72(t), the funds are distributed to you as SEPPs.
The rule of 55 is an IRS guideline that allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55.
The IRS (via the Notice) established a new minimum interest rate of 5% for calculating 72(t) payments, representing a significant increase over the previous maximum of 120% of the applicable Federal mid-term rate. The previous maximum was 120% of the applicable Federal mid-term rate (2.09% for March 2022).
You reach age 70½ after December 31, 2019, so you are not required to take a minimum distribution until you reach 72. You reached age 72 on July 1, 2021. You must take your first RMD (for 2021) by April 1, 2022, with subsequent RMDs on December 31st annually thereafter.
If you are between ages 55 and 59 1/2 and get laid off or fired or quit your job, the IRS rule of 55 lets you pull money out of your 401(k) or 403(b) plan without penalty. 1 It applies to workers who leave their jobs anytime during or after the year of their 55th birthday.
Once started, you must continue your 72(t) distributions for five years beginning with the date of the first payment or until age 59 ½, whichever is longer. Thereafter, you are free to take any distribution from your IRA permitted by law.
If you open an IRA, you can take money out whenever you'd like, for any reason, as long as your funds last. Most employer-sponsored plans require you to demonstrate and immediate and heavy financial need to qualify for pre-retirement withdrawals.
You can start your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount.
Experts say to have at least seven times your salary saved at age 55. That means if you make $55,000 a year, you should have at least $385,000 saved for retirement. Keep in mind that life is unpredictable–economic factors, medical care, and how long you live will also impact your retirement expenses.
/ You must be at least age 62 to begin receiving benefits.
Rule 72(t) can depend on what type of retirement accounts you have and your reasons for taking early withdrawals. If you've been saving consistently in your 401(k) and you'd like to retire early, then the Rule of 55 could allow you to do that without having to pay a 10% early withdrawal penalty.
The life expectancy method is a way of calculating individual retirement account (IRA) distribution payments by dividing the balance or total value of a retirement account by the policyholder's anticipated length of life.
What Is Rule 72(t)? Rule 72(t) allows penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. It is issued by the Internal Revenue Service.
In order to qualify as a 72t distribution, the employee must take at least 5 substantially equal periodic payments (SEPP) that are calculated either on the required minimum distributions method, the amortization method, or the annuitization method based on certain life expectancy tables and calculations.
Yes. With a 72(t) distribution, the IRS is only concerned with the account sending the payments, and your employment status and other income is irrelevant.
A SIMPLE IRA allows both the employee and the small business owner or sole proprietor to make contributions. A SEP-IRA, meanwhile, only allows business owners to make contributions for both themselves and their employees. The contribution limits of a SIMPLE IRA vs. SEP-IRA are different too.
SEP plan limits
For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020).