DEFINITION of 'Substantially Equal Periodic Payment - SEPP'

A substantially equal periodic payment (SEPP) plan allows individuals who have invested in an IRA or another qualified retirement plan to withdraw funds prior to the age of 59½ and avoid income tax and early-withdrawal penalties. Typically, an individual who removes assets from a plan prior to age 59½ will face taxes on that withdrawal and will also be subject to a 10% penalty. With substantially equal periodic payments, the funds are placed into a substantially equal periodic payment (SEPP) plan that pays the individual annual distributions for five years or until he or she turns 59½, whichever comes later.

BREAKING DOWN 'Substantially Equal Periodic Payment - SEPP'

Because the IRS requires individuals to continue the substantially equal periodic payment (SEPP) plan 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. Substantially equal periodic payment (SEPP) plans are also permitted with money from employee-sponsored qualified plans, such as 401(k) plans, but you cannot be currently working for the employer that sponsored that plan.

There are three IRS-approved methods used to calculate SEPPs (amortization, annuitization, and required minimum distribution), and each one results in a different calculated amount. The IRS advises individuals to select the method that bests supports his or her own personal financial situation. 

Experts warn that taxpayers run the risk of making costly mistakes when working with substantially equal periodic payments (SEPPs) plans due to lack of guidance and rules. Click here for further information.

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