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 (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SEPP amount, the SEPP programs will be considered voided, and you will owe the IRS an excise tax of 10% of the amount withdrawn unless another exception applies.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