Substantially Equal Periodic Payment (SEPP)
Candlefocus EditorThe purpose of a SEPP plan is not to provide an “easy” way to access retirement funds early, but rather to cater to those who need to access these funds sooner than expected. This includes those who have experienced an event that leaves them unable to work and needing extra income, or those who may have unexpectedly been eligible to retire earlier than they anticipated.
In order to establish a SEPP plan, the amount of each separate payment must be calculated by using one of three IRS approved methods, including the amortization method, the annuitization method, or the required minimum distribution method.
The key requirement of a SEPP plan is that the payments must be “substantially equal.” This means that the amount of each payment may be changed, but the payments must not vary by more than a certain percentage in any single year.
Once the SEPP plan is in place, the investor may continue to receive the payment each year until the plan reaches its five-year limit, at which point the investor will be subject to the usual 10 percent early withdrawal penalty for any distributions. Due to this, it is important to understand the details of a SEPP plan and consider the risks before signing up for one.
In short, a Substantially Equal Periodic Payment (SEPP) plan is an option for investors who need to access retirement funds before the standard 59 1/2-year age limit. It allows for early access to funds without life-long penalties or taxes, as long as the plan runs for five continuous years and distributes payments in substantially equal amounts. As with all retirement plans, there are risks associated with SEPP plans and it is important to understand and consider these risks before signing up.