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

By Denise Appleby AAA
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SEPP amount, the SEPP programs will be considered voided, and you will owe the IRS an excise tax of 10% of the amount withdrawn unless another exception applies.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. Does it make sense to convert a Traditional IRA to a Roth when the market’s down?

    If your modified adjusted gross income (MAGI) is $100,000 or less and you are not married filing separately, you may initiate ...
  2. Can I roll a Traditional IRA into a 529 college account for my grandchild?

    A 529 plan, also known as a "qualified tuition program", is an investment vehicle that allows individuals to save for education ...
  3. Can I still set up an SEP if one of my employees refuses to participate?

    You can establish the SEP IRA, even if the employee refuses to participant. However, you would need to establish an IRA for ...
  4. I want to close my IRA account. What percentage will I lose to tax?

    You can move the amount by means of a trustee-to-trustee transfer to another IRA, or roll over the amount to your 401(k). ...
RELATED TERMS
  1. Gold IRA

    Definition of Gold IRA
  2. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  6. MyRA

    A new tax-advantaged retirement account that President Barack ...
comments powered by Disqus
Related Articles
  1. I Was Intimidated By Investing, But ...
    Investing Basics

    I Was Intimidated By Investing, But ...

  2. Impact Of Continuing To Work In Retirement ...
    Retirement

    Impact Of Continuing To Work In Retirement ...

  3. Independent 401(K): A Top Retirement ...
    Retirement

    Independent 401(K): A Top Retirement ...

  4. After-Tax Balance Rules For Retirement ...
    Taxes

    After-Tax Balance Rules For Retirement ...

  5. Guide To 401(k) And IRA Rollovers
    Retirement

    Guide To 401(k) And IRA Rollovers

Trading Center