DEFINITION of 'Substantially Equal Periodic Payment - SEPP'
A plan that allows individuals who have invested in an IRA or another qualified retirement plan to withdraw funds prior to the age of 59.5 and avoid income tax and early-withdrawal penalties. Typically, an individual who removes assets from a plan prior to age 59.5 will face taxes on any income generated by the fund - interest income or capital gain - and will also be subject to a 10% penalty. With substantially equal periodic payments, the funds are placed into an SEPP plan that pays the individual annual distributions for five years or until he or she turns 59.5, whichever comes last.
BREAKING DOWN 'Substantially Equal Periodic Payment - SEPP'
Because the IRS requires individuals to continue the SEPP program for a minimum of five years, this is not a solution for those who seek penalty-free short-term access to retirement funds. If you cancel the plan before the minimum holding period expires, you will be required to pay the IRS all the penalties that were waived on amounts taken under the program, plus interest. SEPP programs are not permitted under employee-sponsored qualified plans, such as 401(k) plans.