how to calculate substantially equal periodic payment sepp plan withdrawals
as noted above 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 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 the life expectancy of the taxpayer and his or her beneficiary if applicable and a chosen interest rate of not more than 120 of the federal mid term rate according to the irs 3as with the amortization method the distribution you must take under the annuitization method is also the same each year the amount is determined by using an annuity based on the taxpayer s age and the age of their beneficiary if applicable and a chosen interest rate with the same irs guidelines as with amortization the annuity factor is derived using an irs provided mortality table 3using the rmd method the annual payment for each year is determined by dividing the account balance by the life expectancy factor of the taxpayer and their beneficiary if applicable under this method the annual amount must be recalculated annually and as a result will change from year to year 3 it also generally results in lower annual withdrawals than the other methods early withdrawals under substantially equal periodic payments are made possible under irs rule 72 t the rule allows individual taxpayers with early access to their retirement accounts without incurring any penalties advantages and disadvantages of substantially equal periodic payment sepp plansusing a sepp plan can be a boon to those who wish or need to tap into retirement funds early the plan can allow you a steady stream of income penalty free in 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 59 you can withdraw additional funds from your retirement accounts without penalty by your late 60s you ll qualify for full benefits from social security and perhaps a defined benefit pension 56the restrictions for sepp stay in place until the end of the payment term which is the latter of five years or the ira owner reaching age 59 so for example an ira owner that began sepps at age 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 age 63 importantly this five year time period is measured from the date of the first distribution and ends exactly five years from that date it does not end after the fifth distribution is made 7one of the drawbacks of the sepp program is that it is relatively inflexible once you begin a sepp plan you must stay with it for the duration which can potentially be decades if you begin the plan in your 30s or 40s during that time 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 given the fact it imposes on you 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 withdrawals within any one year 4starting 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 plan it is tapping into meaning its balance will not grow through further contributions and by withdrawing funds early you re also essentially foregoing the earnings they ll make later along with the tax you ll save on those gains which will compound tax free within the account provides steady stream of income before retirementwithdrawals are penalty free at 59 five year period ends five years after the first distributionplan holders must stay within the plan until the duration which makes them inflexiblethe amount withdrawn can t be alteredquitting the plan isn t an optionaccount balance doesn t grow through further contributions