72(t): Substantially Equal Periodic Payments

Substantially Equal Periodic Payments (SEPPs) are also referred to as 72(t) payments. IRA owners who need access to their IRA accounts but are under age 59½ sometimes choose to set up a SEPP plan. Why? Because Internal Revenue Code 72(t) permits a series of substantially equal periodic payments (SEPPs) that are not subject to the 10% early withdrawal penalty.

It is important to make sure you discuss a SEPP strategy with your retirement distribution expert and/or tax professional to make sure a SEPP plan is right for you before initiating one.

Basic SEPP Rules:

• Most modifications are prohibited (there are few exceptions).

• No contributions or additional withdrawals are permitted.

• You can’t rollover SEPP distributions back into the IRA or another IRA.

• You can’t convert SEPP distributions into a Roth.

• Distributions must continue for the longer of a full 5 years or reaching age 59½.

• The minimum 5 year distribution requirement is not waivable and applies regardless of whether your initial need for the money no longer exists.

To illustrate…

Scenario 1:

Assume you just turned 45 years old and start a 72(t) plan. Your SEPPs must continue at least until you are 59½. In this case, at age 59½ you will satisfy both the 5 year minimum distribution and age 59½ requirements.

Scenario 2:

Assume you just turned 58 years old and start a 72(t) plan. Your SEPPs must continue at least through the year you turn 63 years old. In this case, at age 63 you will satisfy both the 5 year minimum distribution and age 59½ requirements.