Substantially equal periodic payments (SEPPs) allow for penalty-free withdrawals from retirement plans before the age of 59½. SEPPs require annual disbursements for at least five years or until the recipient turns 59½. Exceptions include disability, depletion of the fund balance, or death before the five-year minimum. SEPPs may not be the best option for short-term financial crises, and eligibility depends on the age of the recipient.
Substantially equal periodic payments are withdrawals from qualified retirement plans that occur earlier, but are not subject to any type of early withdrawal or tax penalties. Payments of this type, generally known as SEPPs, are generally associated with retirement plans for United States citizens. Plans like an Individual Retirement Plan are structured to allow withdrawals before the age of 59½ without any penalties involved. Employer-sponsored plans, such as 401(k) plans, are generally not eligible for inclusion in a SEPP strategy.
The most common reasons for withdrawing funds from a retirement plan have to do with unforeseen financial hardship. Simply withdrawing the funds would mean paying any early withdrawal fees imposed by the plan itself, as well as paying any taxes and penalties due to federal or state tax agencies. With a substantially equal periodic payment schedule, it is possible to avoid all those taxes and penalties while still having access to funds while you recover from the circumstances that led to the financial reversal.
The structure of a SEPP plan requires the issuance of annual disbursements over a period of at least five years, or until the recipient turns 59½, whichever occurs last. This is because current regulations set forth by the US Internal Revenue Service require that the substantially equal periodic payment schedule continue for a minimum of five consecutive years. In the event the plan is terminated prior to the end of this minimum five-year period, all previously waived penalties and fees must be paid, plus interest on the balance of those fees and penalties.
Since participation in a substantially equal periodic payment program requires a commitment of at least five years, using this type of strategy may not be the best way to handle a short-term financial crisis. The age at which the SEPP plan is important, as someone in their fifties may need the funds for financial emergencies and will be five years old shortly before turning 59½. In this scenario, transitioning the retirement plan funds to a substantially equal period payment plan would make sense.
Conversely, a person in their forties would want to consider other means of managing the financial reversal. Since current regulations require the substantially equal periodic payment plan to remain in effect for five calendar years or until the recipient turns 59½, whichever is later, this means that someone who is 42 would have to remain in plan a minimum of 17 and a half years to avoid paying fines and interest on disbursements. In these circumstances, the amount of the annual disbursements may or may not be worth it.
There are some exceptions that make it possible to use substantially the same periodic payment strategy and avoid penalties. A recipient who becomes disabled before that five-year minimum would be exempt from paying the fines and fees. If the fund balance in the plan is depleted before five years have passed, penalties are also not assessed. This is true if the funds are simply depleted or the balance is reduced due to the loss in the market value of the underlying assets. If the recipient must die before the minimum five-year period is up, there are no penalties or fees.
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