What are the "certain requirements" that must be met for substantially equal periodic payments (SEPPs)? Is it taxed at 20%? Is there any downside to the SEPP?

By Denise Appleby AAA
A:

For substantially equal periodic payments (SEPPs), the distributions would occur from your IRA after you rollover the assets. (SEPPs are also allowed from qualified plans after the participant has separated from service - this does not apply to you at this time.) There are no mandatory withholding requirements for these or any other IRA distributions. However, if you fail to make a withholding election, including an election to have no withholding, your IRA custodian must withhold at least 10% of your distribution amount for federal taxes. The amount distributed for the year will be treated as ordinary income and subjected to your income tax rate.

Caution: Underpayment of estimated tax could result in IRS penalties. If you choose to have no withholding from your IRA distribution, check with your tax professional to make sure you meet estimate tax payment requirements (if applicable) from other sources.

Under the SEPP program, you are required to distribute a fixed amount each year. As long as you distribute the required total amount by the end of each year, you may take this amount on any frequency: either monthly, quarterly or semi-annually.

Under the SEPP program, you may choose one of three methods to calculate your annual distribution amounts: the amortization, annuitization, or life-expectancy method. Each method gives a different result, and the life expectancy method gives the lowest. Once you determine this amount, you must continue to distribute it for five years or until you reach age 59 ½, whichever is longer.

Most IRA custodians will assist you with the calculation. Alternatively, you may calculate the amount yourself using a calculator available at www.72t.net. This website provides a regular calculator with which you use a pre-established account balance to determine your annual distribution amounts and a reverse calculator with which you determine the balance you will need in order to obtain your desired distribution total.

If you find that your account balance will give you a distribution in excess of the amount that you need, you may establish a separate IRA to hold the extra amount, which would give you a lower balance in your first account, from which you can take your required annual amounts. This separate additional IRA is necessary because during the period you are required to continue the SEPP payments, you may not add other assets or take any other distributions. Maintaining a separate IRA will allow you to make annual IRA contributions and complete transfers and rollovers.

For more information, read some FAQs at the IRS website and the Investopedia article "Rules Regarding Substantially Equal Periodic Payment."

Due to the complex nature of these calculations, we recommend that you consult with a tax professional to ensure that your payments/SEPP distributions meet regulatory requirements.

Check out the first part of this question, which explains the tax implications of distributions from a qualified plan in accordance with a qualified domestic relations order.

This question was answered by Denise Appleby
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Contact Denise)

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