Substantially Equal Periodic Payment (SEPP)

SEPPs are the funds you get when you make an early retirement withdrawal under rule 72 (t). However, to understand how these payments work, you need to know some things about early retirement payments in the US. 

If citizens need to withdraw some of their retirement savings before time, the IRS may charge them with a 10% withdrawal penalty. That’s because having a tax-advantaged retirement account can be highly beneficial to people, but they need to withdraw that money when the time comes. 

Regardless of that, the Internal Revenue Code allows you to have access to your retirement funds before you get to the age the IRS requires you to be. Those exceptions are the Substantially Equal Periodic Payments under Rule 72 (t).

What Does Rule 72 (t) State?

As said before, Rule 72 (t) is in the Internal Revenue Code, which states many things regarding tax laws and how the IRS works. This rule of the IRC shows how an individual can early withdraw funds from a tax-advantaged account such as an individual retirement account (IRA) without needing to pay additional fees or penalties. 

It’s essential to understand how the process works to get to the profits you made from your capital gain taxes without paying the 10% penalties. Yet, that only applies if you are not at least 59 ½, since any age before that is considered an early withdrawal. 

Apart from Rule 72 (t), the IRS allows people to make early withdrawals if specific circumstances are met. Some of them are permanent disability, essential medical expenses, college tuition, payments, and even a first-time house purchase. However, not everyone is under those conditions and needs the money for other things that are also important. 

That’s when Rule 72 (t) helps citizens. If you don’t meet any of the conditions the IRS has for early withdrawals, you can take advantage of Rule 72 (t) to avoid withdrawal penalties.

How Does Rule 72 (t) and SEPPs Work?

Rule 72 (t) allows you to make early withdrawals by setting a withdrawal schedule. If you want to profit from your early retirement funds you need to make at least five of those early withdrawals, which are called SEPPs. 

As said before, you need to make five SEPPs to take advantage of them. You need to make those withdrawals over five years or until you turn 59 ½. Your early withdrawal money is distributed in those five SEPPs. 

Making that withdrawal schedule is no easy task, though. You need to follow a specific process if you want to get access to your funds. That process has its own rules, so you also need to study them if you are up to get your early retirement funds. 

If you don’t do that process correctly and don’t follow its rules, you may need to pay the 10% penalty to the IRS. Anyone should go through this process alone since it can get considerably complex as you go through it. Financial advisors are more than qualified to help you with this matter. 

Yet, you still need to understand SEPPs’ rules to make a successful withdrawal. Here are the rules you need to follow: 

Schedule Annual Payments

This is one of the most important things you need to consider when making early withdrawals from a qualified retirement account. You can schedule more frequent payments in one year, but you still have to make at least make one annually. 

If you don’t, you can end up not only paying the 10% penalty for your early withdrawal but a penalty but each withdrawal you have done. 

Pay Income Taxes with Money That Is Not Taxed

It’s also crucial that every income tax from earnings or contributions in your retirement account is paid with money that is not taxed. That includes investment earnings from Roth accounts. Pay attention and study all tax regulations. Not knowing them can make you lose tons of money in the future or put you in trouble with the IRS. 

Don’t Withdraw Money from Your Employer’s Account

You can’t withdraw money from an account that your former employer is managing. Not all retirement accounts are accepted or meet the requirements you need to make early withdrawals. If you want to use a retirement account at your former job, know that those are not eligible for SEPPs. 

How to Calculate SEPPs

The IRS lets you withdraw SEPPs and tells you what exact amount you can withdraw based on your life expectancy. Life expectancy is also used to set the SEPPs withdrawal schedule. 

There are three ways to calculate your SEPPs by using IRS tables. Make sure to choose the one that best suits you depending on your circumstances. The tables are: 

  • The Single Expectancy Table.
  • The Joint and the Last Survivor Expectancy Table.
  • The Uniform Table. 

Wrapping Up -Should You Use Rule 72 (t)? 

Now that you understand how Rule 72 (t) and SEPPs work, you can come to the question: Should I use Rule 72 (t) to get access to my retirement funds earlier? It’s difficult to answer that question, but you could do it depending on your situation. Going through that process is not as easy as it seems, but with the proper assistance, you can do it with no trouble. 

Financial emergencies are stressful and can progress over time. There are many ways to make money quickly, but not all of them are easy to do or as effective as you need them to be. Try exhausting all your other alternatives before using Rule 72 (t). 

Yet, if you decide to go through this process, try hiring a financial advisor. It could seem like a waste of money, but it can help you make the process easier and more comfortable for you. Take into account that getting your retirement money now can reduce your profits and earnings in the future. 

Remember that when you early withdraw money from a qualified retirement account is because you need it at the moment. If you just want to buy something or want the money for something you don’t need, then try making money in other ways and save that money for the future.