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Use Your Retirement Savings Early With Substantially Equal Periodic Payments

By Matthew Frankel, CFP® - May 19, 2017 at 5:24PM

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Here's a way to get around the IRS's early distribution penalty.

In general, you can't withdraw from your IRA or qualified retirement plan, such as a 401(k) or 403(b), until you reach 59 1/2 years of age. However, there's an exception that says if you're willing to withdraw the money in substantially equal periodic payments, or SEPP, based on your life expectancy, you're exempt from the 10% early withdrawal penalty.

Substantially equal periodic payments: The rules

In order to use the SEPP exception, you'll need to withdraw money from your qualified retirement accounts at least once per year, and must continue the withdrawals for at least five years, or until you reach age 59 1/2, whichever is longer.

In other words, if you start taking substantially equal periodic payments from your IRA at age 50, you'll need to continue taking distributions at least once per year until you reach age 59 1/2. On the other hand, if you start SEPP at age 57, you'll need to continue to do so for at least five years, until you're 62.

Jar of money labeled "retirement".

Image source: Getty Images.

Three ways to calculate your SEPP

The IRS allows you to use any one of three methods to calculate your annual SEPP:

1. The required minimum distribution (RMD) method

This is the same method used to calculate required minimum distributions from an IRA or 401(k) after the account owner reaches age 70 1/2 (LINK). Basically, you use one of three life expectancy tables provided by the IRS to determine your life expectancy factor, and divide your account balance by this amount. This is generally the easiest of the three methods, but also typically results in the smallest annual distribution amount.

Most people use the Single Life Expectancy table to calculate their SEPP with this method. For example, if you're 50 and had $800,000 in your 401(k) at the end of last year, you have a life expectancy factor of 34.2. Dividing your account balance by this factor gives a SEPP of $23,392 for this year. Next year, you would recalculate your SEPP using your account's balance from the end of this year, and your life expectancy factor for next year.

2. The fixed amortization method

This method is a bit more complicated, and essentially consists of amortizing your account over your life expectancy (from one of the three IRS tables) combined with an interest rate. This method produces the same distribution amount every year. While it's a more complicated calculation -- the mathematics of it are beyond the scope of this article -- it generally results in a larger annual amount than the RMD method.

3. The fixed annuitization method

Like the fixed amortization method, this results in the same distribution amount every year, and usually is a larger annual amount than the RMD method. This method uses an annuity factor from an IRS mortality table, combined with an interest rate not to exceed 120% of the federal mid-term rate, to produce an annual distribution amount. For the latter two calculations, I strongly suggest consulting with a tax advisor before you actually withdraw any money.

You are allowed to make a one-time change from either of the latter two methods to the RMD method, but not the other way around. In other words, you can't simply change the SEPP calculation method every year to suit your then-current needs.

How much can you withdraw without a penalty?

Here's an easy-to-use calculator that can do the hard work for you, with some instructions for using it:


* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

As an example, let's say that I want to start withdrawing money from my IRA at age 55, and that my account balance is $1,000,000 at that time. Using the calculator's assumed 6% investment return and 2.36% reasonable interest rate, I could choose to take any of the following SEPPs this year:

  • Using the RMD method, I could take $33,784 according to the single life expectancy table. The Uniform Life and Joint Life tables produce SEPPs of $24,038 and $26,882, respectively. (Note: The Joint Life table only applies if your account's beneficiary is your spouse and he/she is more than 10 years younger than you are.)
  • Using the fixed amortization method, I can withdraw $47,328 using the single life table. Using the other two, I could withdraw $38,000 or $40,683.
  • Using the fixed annuitization method, I can withdraw $47,116. Since there is only one table used with this method, there's only one SEPP option.

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