A:

If an individual modifies a substantially equal periodic payment (SEPP), including discontinuing the SEPP before the end of the applicable SEPP period or increasing or decreasing the required amount in a manner that is not allowed under the regulations, all of the 10% penalty (additional tax) waived under Rule 72(t) becomes due. According to IRC 72(t)(4), interest also applies to these amounts. Payments that occur after the SEPP has been modified will be treated as regular distributions subject to the 10% additional tax, unless an exception applies.

Several exceptions to the modification rules apply, however. For instance, an individual may reduce his or her SEPP amount by making a one-time switch from the amortization or annuitization method to the required minimum distribution (RMD) method. Individuals should check with their tax professional to determine whether a modification has occurred.

For further reading, see Rules Regarding Substantially Equal Periodic Payment, Taking Penalty-Free Withdrawals From Your IRA and Avoiding IRS Penalties On Your IRA Assets.

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. Do I have to continue SEPPs for an inherited IRA?

    You may discontinue the payments. Once the person who is taking the substantially equal periodic payment (SEPP) dies or becomes ... Read Answer >>
  3. What are the "certain requirements" that must be met for substantially equal periodic ...

    For substantially equal periodic payments (SEPPs), the distributions would occur from your IRA after you rollover the assets. ... Read Answer >>
  4. I am in the second year of taking SEPP distributions from my IRA. Can I transfer ...

    The most recent guidance issued by the IRS and the Treasury Department is Revenue Ruling 2002-62. There is some disagreement ... Read Answer >>
Related Articles
  1. Retirement

    Substantially Equal Periodic Payment (SEPP): Learn The Rules

    Taxpayers often make costly mistakes with SEPP programs because there is little guidance on what can be done in certain situations.
  2. Retirement

    Tax-Saving Advice for IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  3. Taxes

    How 401(k) Withdrawals Work When You're Unemployed

    Unemployed individuals can pursue several options when taking money out of their 401(k), but they should carefully weigh taxes and possible penalties
  4. Retirement

    Retirement Withdrawal Tricks You Should Know

    From SEPP to NUA, retirement withdrawal rules are full of complicated acronyms. But understanding them will help with your retirement income strategy.
  5. Retirement

    Tapping Retirement Funds Early – Without a Penalty

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

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  7. Retirement

    Should I Use My IRA to Pay Off My Credit Cards?

    Cashing in an IRA to deal with outstanding credit card balances may not be the best way, but sometimes it's the best available way. Here's how.
  8. Retirement

    Alternative Investments In Your IRA

    If you stray off the beaten path when investing your IRA assets, you'll find new potential pitfalls and rewards.
  9. Financial Advisor

    How to Save Clients from RMD Aggregation Mistakes

    Advisors can help clients avoid required minimum distribution mistakes in their retirement plans.
  10. Taxes

    Estimated Taxes: Back To Basics

    Will you owe estimated taxes for the year? Here are some rules that apply and tips on avoiding any associated penalties.
RELATED TERMS
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Rule 72(t)

    An Internal Revenue Service (IRS) rule that allows for penalty-free ...
  3. Premature Distribution

    Any distribution taken from an IRA, qualified plan or tax-deferred ...
  4. Required Minimum Distribution Method

    One of three methods by which early retirees of any age can access ...
  5. Fixed Annuitization Method

    One of three methods by which early retirees of any age can access ...
  6. Excess Accumulation Penalty

    The penalty a retirement account owner or the beneficiary of ...
Hot Definitions
  1. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  2. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  5. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center