Substantially equal periodic payments

Substantially equal periodic payments (SEPP) are one of the exceptions in the United States Internal Revenue Code that allows a retiree to receive payments before age 591⁄2 from a retirement plan or deferred annuity without the 10% early distribution penalty under certain circumstances.^[1]

Rules[edit]

The rules for SEPPs are set out in Code section 72(t) (for retirement plans) and section 72(q) (for annuities), and allow for three methods of calculating the allowed withdrawal amount:

• Required minimum distribution method, based on the life expectancy of the account owner (or the joint life of the owner and his/her beneficiary) using the IRS tables for required minimum distributions.
• Fixed amortization method over the life expectancy of the owner.
• Fixed annuity method using an annuity factor from a reasonable mortality table.^[2]

The interest rate that can be used in the latter two calculations can be any rate up to 5% per annum, or up to 120% of the Applicable Federal Mid Term rate (AFR) for either of the two months prior to the calculation.^[2] SEPP payments must continue for the longer of five years or until the account owner reaches 591⁄2.^[2] The payments cannot be changed beyond a one-time allowed change from one of the latter two calculation methods to the first or all of the payments received will be retroactively taxable and penalized.^[3][4]

If the retirement account owner withdraws more or less than the amount calculated under the SEPP formula, the 10% early distribution penalty that was waived would apply in all instances (where it was waived under the SEPP program), and interest on those amounts would also apply.

References[edit]

External links[edit]

• IRS Publication 590 , Individual Retirement Arrangements (IRAs)
• IRS Publication 575 , Pension and Annuity Income