Substantially Equal Periodic Payments (SEPP): Early Retirement Options

Substantially equal periodic payments is a system that allows an individual to start withdrawing money from a retirement account before hitting the age of 59 1/2. With this system, an individual can gain access to the money without having to pay an early distribution penalty. Here are a few things to consider about the substantially equal periodic payment system.

Withdrawing Early

Under the normal rules associated with an IRA, 401k, or 403b plan, an individual cannot take money out of their account until they turn 59 1/2. If you take money out of your retirement account before this age, you typically have to pay a 10 percent early distribution penalty. This can be a large penalty to have to deal with and it will eat into the amount of money that you withdraw. Typically, there is an exception that you can use known as a hardship withdrawal. A hardship withdrawal is usually very specific and must be documented.

With these rules, it may seem difficult to get access to the money in your retirement account before you are of retirement age. However, with substantially equal periodic payments, it is possible to get the money that you need. With this system, you do not have to pay any early distribution penalties on the money that you take.

How It Works

With the substantially equal periodic payments, you start taking equal payments from your retirement account. Once you start the program, you have to stay engaged in it for a specific amount of time. You have to be taking payments for at least five years or until you reach the age of 59 1/2. You have to stay in the program until the whichever one occurs last. For example, if you are 57 when you start the program, you will have to keep using it until you turn 62. If you are 40 when you start the program, you will have to keep using it until you reach the age of 59 1/2.

Risks

This type of payment system can be very risky. If you enter it too early, you will essentially be depleting all of the money that you have in your retirement account. For example, if you start when you are 40, you will basically have to take money out of the account for the next 20 years. This can quickly eat up all of the retirement money that you have.

Calculating Payments

There are three methods that can be used in order to calculate your payments for this program. The first method is known as the amortization method. With this method, the payment will be based on the life expectancy of the individual and their beneficiary plus an interest rate.

Another method that can be used is the annuitization method. With this method, the payment will be based on using an annuity and it will be the same each year.

The other method is known as the required minimum distribution method. With this method, the account balance will be divided by the life expectancy of the individual and the payment will be calculated.