Format for printing

Once You Start You Can't Stop
One of the problems with taking a SEPP from your IRA account is that once you begin, you're stuck with taking at least an annual distribution for the LATER of five years OR until you reach age 59½. So if you're age 40, you can expect 19½ years of these distributions. If you're 52, you can expect to take these distributions for 7½ years. And, if you begin your distributions at age 57, you'll be stuck with them until you are age 62. In addition, once you begin taking these distributions under a SEPP, you can't take larger distributions from the same account until your five-year/age 59½ requirements have expired. So your decision to take your IRA funds using a SEPP is something that you can't take lightly.

Another issue to consider before taking SEPP payments is your need for the income. You might be pleased in the first few years, but you may subsequently find that you really need to satisfy that life-long craving for a Ferrari Testarossa. So you decide to take a large chunk of money out of your IRA account -- much larger than the amount allowed under the SEPP method. What's the harm? Well, the harm is that all of your prior distributions taken under your SEPP will be subject to the 10% early withdrawal penalty plus an additional penalty for not paying the 10% in the years each distribution was taken. As you can imagine, that penalty could be humongous, and not something that you want. So, again, before selecting your SEPP method, make sure that you can live with that method for at least five years or until age 59½, whichever is later.

Multiple IRAs
If you have multiple IRAs, you may apply separate SEPP methods for each separate IRA. This is one of the few times that you don't have to lump all of your IRA accounts together and treat them as one big enchilada. This might come in handy when you begin a conservative SEPP distribution method from one separate IRA account, and then find that you need additional income.

If you find yourself in that position, you can simply begin a new SEPP method from another of your IRA accounts -- a method that might be a bit more aggressive and allow you even greater supplemental income. The ability to use separate SEPP methods in different IRA accounts might lead you to consider creating separate IRA accounts prior to your initial IRA distribution. While it may be a bit more expensive to maintain multiple IRA accounts, you might simply think of it as payment for a little insurance policy.

Keep in mind, though, that if you take SEPP from more than one account, the five-year/age 59½ rule applies to each account separately. The time clock doesn't start ticking under that rule until you take the first SEPP from a particular account. Start SEPP using one method in the first IRA at age 50, and you must take SEPP from that IRA using that method until age 59½. Start SEPP using a different method in a second IRA at age 57, and you must continue to take SEPP from the second IRA using the second method until age 62.

The 401(k) Penalty Exception
Another exception that many potential retirees find appealing is that for 401(k) plan distributions. If you separate from the service of your employer in the year you reach the age of 55, then you may take distributions from the 401(k) plan you had with that employer free of any early withdrawal penalty. This doesn't mean that you can retire at age 53 and then begin taking penalty-free distributions from your 401(k) account when you finally reach age 55. Instead, if you retire before the year in which you reach age 55, your 401(k) funds are effectively locked up until age 59½, unless you can bypass the penalty by using a SEPP distribution method.

Company Stock
If you participate in a qualified Employee Stock Option Plan, when you retire your plan will specify what you may do with those shares. Sometimes they must be sold to your employer for redemption, which means you may only take the cash. Often, though, you may take the shares with you when you leave the job. Those shares may be transferred to an IRA or you may take them directly. Although you will incur income taxes by taking those shares directly, that may be the best option for you from a tax viewpoint. We've got details on this option at Fool.com in an article on Taking Stock.

« Before Age 59 ½ - SEPP

59 ½ - 70 ½ »