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)

  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. 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 >>
  3. 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 >>
  4. Once substantially equal periodic payments (SEPP) of an IRA have started, is the ...

    Typically, if you withdraw assets from an IRA or a qualified retirement plan sponsored by your employer while under the age ... Read Answer >>
  5. I want to purchase a five-year period certain single premium immediate annuity (SPIA) ...

    The income from a SPIA IRA is subject to the early distribution penalty unless an exception applies. As you may know, the ... Read Answer >>
Related Articles
  1. Retirement

    Retirement Plan Tax Form 5329: When To File

    Read this if you've taken early distributions or owe excess-contribution or excess-accumulation penalties.
  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

    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.
  4. 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.
  5. Retirement

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  6. Retirement

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  7. Retirement

    5 Penalty-Free IRA Withdrawals

    Most Americans think that an IRA is locked up until they reach 59.5, and withdrawals before that date trigger taxes and a 10% penalty tax. This is not always true.
  8. Financial Advisor

    Best Ways to Avoid RMD Tax Hits on IRAs

    If you want to avoid hefty tax penalties, read this cheat sheet on IRA required minimum distributions.
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Fixed Annuitization Method

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

    The penalty a retirement account owner or the beneficiary of ...
  4. Fixed Amortization Method

    One of three methods by which early retirees of any age can access ...
  5. Lump-Sum Distribution

    A one-time payment for the entire amount due, rather than breaking ...
  6. Required Minimum Distribution - RMD

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

    A loan program that provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional ...
  2. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  3. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  4. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
  5. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  6. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
Trading Center