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
(
Contact Denise)

RELATED FAQS
  1. Will I incur a tax penalty when making withdrawls from my IRA in excess of my SEPP?

    Unfortunately, the IRA is "locked" for five years because of the requirement that the substantially equal periodic payment ... Read Answer >>
  2. I have just been laid off. Can I use my 401(k) for living expenses now and report ...

  3. Can a traditional IRA be opened with a large sum of money?

    After losing my job of 8 years, I found it difficult to find comparable employment and keep my home. In a panic and without ... Read Answer >>
  4. I stopped distributions from my retirement account while under Rule 72(t). Will this ...

    If an individual modifies a substantially equal periodic payment (SEPP), including discontinuing the SEPP before the end ... Read Answer >>
  5. How much of my retirement account can I convert to a Roth IRA?

    I'm retired and recently learned I can convert some of the money in my retirement account to a Roth IRA to avoid Required ... Read Answer >>
  6. Can I elect to NOT have income tax withheld from an IRA (NOT ROTH) distribution before ...

Related Articles
  1. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  2. Retirement

    Tapping Retirement Funds Early – Without A Penalty

    The IRS offers several ways to skirt the 10% penalty on early retirement distributions.
  3. Retirement

    How an IRA Works After Retirement

    You've read a lot about saving for your future retirement with IRAs. But what happens to the account when the future is here, and you actually retire?
  4. Retirement

    Best Ways to Roll Over Your 401(k)

    When you leave a job, you have some decisions to make about what to do with your 401(k). Here are some choices.
  5. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  6. Retirement

    Avoid the Most Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  7. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
  8. Retirement

    Top 10 Mistakes To Avoid On Your IRA

    IRA rules are complicated. It's easy to make mistakes – and they can cost you big time.
  9. Financial Advisor

    What Baby Boomers Need to Know About IRA RMDs

    Mandatory minimum distributions from traditional IRAs and qualified plans cannot be avoided. But there are several ways to minimize their impact.
  10. Retirement

    401(k) Rollover: Roth IRA or Traditional IRA?

    Here are the pros and cons of choosing to roll over your 401(k) into a Roth IRA and a traditional IRA.
RELATED TERMS
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  3. IRA Rollover

    A transfer of funds from a retirement account into a Traditional ...
  4. Non-Qualified Distribution

    1) A distribution from a Roth IRA that occurs before the Roth ...
  5. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  6. Required Minimum Distribution - RMD

    The amount that Traditional, SEP and SIMPLE IRA owners and qualified ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center