A:

Unfortunately, the IRA is "locked" for five years because of the requirement that the substantially equal periodic payment (SEPP) must continue for five years or until you reach age 59.5, whichever is longer. Should you withdraw more than the SEPP amount, the SEPP programs will be considered voided, and you will owe the IRS an excise tax of 10% of the amount withdrawn unless another exception applies.

For a complete list of exceptions, please see IRS Publication 590.

If it has been no more than 60 days since you withdrew the amount for the SEPP, you may consider the following:

  • Roll over the SEPP amount that you withdrew. This would make it non-taxable, assuming this is the only rollover involving the IRA for the past twelve months.
  • Set up a separate (second) IRA.
  • Assuming the entire balance is not needed to satisfy the income you require, run a calculation to determine how much you need to keep in the IRA to provide the amounts you need under the SEPP. (The reverse calculator at www.72t.net can be used for this purpose.)
  • Transfer any amount in excess of the balance you need under the SEPP to the second IRA.
  • Start a new SEPP under the first IRA.

You may then withdraw any additional amount you need from the second IRA without affecting the SEPP.

Under this option, if your IRA custodian issues a 1099-R showing an exception to the excise taxfor the amount you withdrew under the first SEPP program (and rolled over), your tax preparer will need to issue a corrected 1099-R for the amount. A corrected 1099-R would also be required in any case where the SEPP is voided and the 1099-R shows the amount as being exempted from the excise tax. (For more on this, see Retirement Plan Tax Forms You May Need to File - Part 1.)

If it has been more than 60 days since you withdrew the SEPP amount, however, the amount is no longer rollover eligible. If you have no other choice but to withdraw the additional amounts from the SEPP IRA, you will be required to pay the excise tax on the distribution amount you intended to treat as an SEPP. You may restart a new SEPP, but before you do, consider that you will be locked in for five years. Also bear in mind that you can transfer a portion to a separate IRA and run the SEPP from that IRA, which would allow you to take additional distributions from the other IRA without breaking the SEPP.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. 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 >>
  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. 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

    How to Avoid the 10% IRA Early Withdrawal Penalty

    How to withdraw funds from your traditional IRA before age 59.5 without paying the 10% penalty.
  3. 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.
  4. Retirement

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  5. 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.
  6. Retirement

    Tapping Retirement Funds Early – Without a Penalty

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

    Unexpected 1099-R Form: What To Do

    Did your IRA custodian report distributions you thought were non-reportable? Find out what went wrong.
  8. 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
  9. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  10. 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.
RELATED TERMS
  1. Substantially Equal Periodic Payment - SEPP

    A plan that allows individuals who have invested in an IRA or ...
  2. Same Property Rule

    A regulation relating to IRA rollovers stipulating that whenever ...
  3. IRA Rollover

    A transfer of funds from a retirement account into a Traditional ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  6. Premature Distribution

    Any distribution taken from an IRA, qualified plan or tax-deferred ...
Hot Definitions
  1. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  2. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  6. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
Trading Center