What Is a Substantially Equal Periodic Payment (SEPP)?

What Is Substantially Equal Periodic Payment (SEPP)?

Substantially Equal Periodic Payment (SEPP) is a method of distributing funds from an individual retirement account (IRA) or other qualified retirement plans (unless you still work for your employer) prior to the age of 59½ that avoids incurring IRS penalties for the withdrawals. Typically, an individual who removes assets from a plan prior to that age will pay an early withdrawal penalty of 10% of the distributed amount.

Funds in SEPP plans are withdrawn penalty-free through specified annual distributions for a period of five years or until the account holder turns 59½, whichever comes later. Income tax must still be paid on the withdrawals.

Key Takeaways

  • A SEPP plan allows you to withdraw funds without penalty from a retirement account before you turn 59½.
  • SEPP plans can be used with any qualified plans with the exception of a 401(k) that is held at a current employer.
  • The amount you withdraw every year is determined by formulas set out by the IRS.
  • A SEPP plan is best suited to those who need a steady stream of pre-retirement income, perhaps to compensate for a career that ended sooner than anticipated.
  • You'll have to pay all the penalties it allowed you to avoid if you quit the SEPP plan before it concludes plus interest on those amounts.

How Substantially Equal Periodic Payment (SEPP) Plans Work

You can use any qualified retirement account with a SEPP plan, with the exception of a 401(k) you hold at your current employer. You set up the SEPP arrangement through a financial advisor or directly with an institution.

At the outset, you must choose among three Internal Revenue Service (IRS)-approved methods for calculating your distributions from a SEPP:

Each will result in a different calculated annual distribution. The amount you withdraw will be pre-determined and unchanged every year, at least with two of the three options.

The IRS advises individuals to select the method that best supports their financial situations. You're permitted to change the method you use once within the lifetime of the plan. Should you cancel the plan before the minimum holding period expires, you will have to pay the IRS all penalties it waived on the plan's distributions, plus interest.

How to Calculate Substantially Equal Periodic Payment (SEPP) Plan Withdrawals

As noted above, there are three different methods approved by the IRS to determine withdrawals from your SEPP plan. We discuss them below in a little more detail.

The Amortization Method

Under the amortization method for calculating the SEPP plan's withdrawals, the annual payment is the same for each year of the program. It's determined by using the life expectancy of the taxpayer and his or her beneficiary, if applicable, and a chosen interest rate of not more than 120% of the federal mid-term rate, according to the IRS.

The Annuatization Method

As with the amortization method, the distribution you must take under the annuitization method is also the same each year. The amount is determined by using an annuity based on the taxpayer's age and the age of their beneficiary, if applicable, and a chosen interest rate, with the same IRS guidelines as with amortization. The annuity factor is derived using an IRS-provided mortality table.

Required Minimum Distribution (RMD) and SEPP

Using the RMD method, the annual payment for each year is determined by dividing the account balance by the life expectancy factor of the taxpayer and their beneficiary, if applicable. Under this method, the annual amount must be recalculated annually and, as a result, will change from year to year. It also generally results in lower annual withdrawals than the other methods.

Early withdrawals under substantially equal periodic payments are made possible under IRS Rule 72(t). The rule allows individual taxpayers with early access to their retirement accounts without incurring any penalties.

Advantages and Disadvantages of Substantially Equal Periodic Payment (SEPP) Plans


Using a SEPP plan can be a boon to those who wish or need to tap into retirement funds early. The plan can allow you a steady stream of income, penalty-free, in your 40s or 50s to help tide you over between the end of a career (and a regular paycheck) and the arrival of other retirement income.

At 59½, you can withdraw additional funds from your retirement accounts without penalty. By your late-60s, you'll qualify for full benefits from Social Security and perhaps a defined-benefit pension.

The restrictions for SEPP stay in place until the end of the payment term, which is the latter of five years or the IRA owner reaching age 59½. So, for example, an IRA owner that began SEPPs at age 40 would have to abide by the restrictions for almost 20 years. On the other hand, an IRA owner who begins SEPPs at age 58 would only have to continue until age 63. Importantly, this five-year time period is measured from the date of the first distribution and ends exactly five years from that date. It does not end after the fifth distribution is made.


One of the drawbacks of the SEPP program is that it is relatively inflexible. Once you begin a SEPP plan, you must stay with it for the duration—which can potentially be decades if you begin the plan in your 30s or 40s.

During that time, you have little to no leeway to alter the amount you can withdraw from the fund each year. And quitting the plan is hardly an option, given the fact it imposes on you all the penalties you saved from launching it, plus interest. The same sanction may also apply should you miscalculate and fail to make the necessary withdrawals within any one year.

Starting a SEPP also has implications for your financial security later in retirement. Once you start a SEPP, you'll have to stop contributing to the plan it is tapping into, meaning its balance will not grow through further contributions. And by withdrawing funds early, you're also essentially foregoing the earnings they'll make later—along with the tax you'll save on those gains, which will compound tax-free within the account.

  • Provides steady stream of income before retirement

  • Withdrawals are penalty-free at 59½

  • Five-year period ends five years after the first distribution

  • Plan holders must stay within the plan until the duration, which makes them inflexible

  • The amount withdrawn can't be altered

  • Quitting the plan isn't an option

  • Account balance doesn't grow through further contributions

What Is a Substantially Equal Periodic Payment Program?

A substantially equal periodic payment program allows individual taxpayers to withdraw from their retirement accounts before they turn 59½ without facing any penalties. Withdrawals can be made from individual retirement accounts or employer-sponsored plans like a 401(k) as long as you are no longer employed with the company. Payments or distributions are made from the account either for five years or until you turn 59½—whichever comes later.

When Can I Start Making Withdrawals From a SEPP Plan?

You can begin making withdrawals from a SEPP plan before you turn 59½. Keep in mind, though, that you must take these payments in accordance with one of the three calculations set up by the IRS. These are the amortization, annuitization, and required minimum distribution methods. Each method leaves you with a different annual distribution. The method you choose should suit your own financial situation.

Can I Take SEPP Withdrawals From My 401(k)?

Yes and no. You can use make withdrawals from your 401(k) through a SEPP program if you are no longer employed with the company. As such, you cannot take any money from your account if you still work for the employer that sponsors the plan.

Are There Any Penalties Associated With SEPP Plans?

There are generally no penalties associated with SEPP plans. But you will be on the hook for penalties and interest if you decide to cancel the plan before you reach the minimum five-year holding period or before you turn 59½—whichever comes later.

The Bottom Line

There are rules in place to protect your retirement nest egg until you need it the most. As such, you can't make early withdrawals from your accounts without incurring penalties. But there are exceptions. Substantially equal periodic payment programs allow you to use your retirement accounts if an exceptional circumstance arises, such as an illness. But there are certain rules you must follow. The IRS has certain calculation methods you must use to determine your distributions and you must take these payments for a certain length of time. If you're unsure of how the program works or if it's right for your situation, be sure to consult a financial or retirement specialist.

Article Sources
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  1. Internal Revenue Service. "Substantially Equal Periodic Payments."

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