# SEPP Explained: Penalty-Free Early Retirement Withdrawals and IRS Rules

![Box Spread: A way to withdraw funds without penalty from a retirement account before turning 59½.](https://www.investopedia.com/thmb/j05fz-hNckqtkglSMdy0R5O1WIc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sepp_final-545f0003642d4a71a311b4f3c2a52af3.png)

*— Michela Buttignol / Investopedia*

## What Is a Substantially Equal Periodic Payment (SEPP)?

A Substantially Equal Periodic Payment (SEPP) plan allows you to withdraw from retirement accounts before age 59½ without the usual 10% penalty, aligning with IRS Rule 72(t). These penalty-free early withdrawals provide a steady income stream, but they require commitment to specific IRS calculation methods and continuous annual distributions. It’s crucial to weigh the benefits and potential impact on long-term savings when considering SEPPs.  

### Key Takeaways

*   Substantially Equal Periodic Payment (SEPP) plans allow penalty-free early withdrawals from retirement accounts, following specific IRS guidelines.  
    
*   SEPP plans require consistent withdrawals for at least five years or until age 59½, whichever is longer, using one of three approved calculation methods.  
    
*   Early termination of a SEPP plan can result in significant penalties, including repayment of waived penalties with interest.  
    
*   While SEPP plans provide a stable income stream for early retirees, they also limit flexibility and prevent further contributions to the accounts.  
    
*   SEPP plans are not suitable for those needing quick cash as they require long-term commitment and structured withdrawals.  
    

## How SEPP Plans Work: A Comprehensive Overview

Early withdrawals from a retirement savings account incur a 10% penalty. The exception is having a SEPP plan. SEPP plans can be set up with any pre-tax qualified retirement account, like a traditional IRA or a 401(k). The SEPP arrangement can be set up through a financial advisor or directly with a financial institution.

You must choose among three [Internal Revenue Service (IRS)](https://www.investopedia.com/articles/personal-finance/082514/how-irs-became-so-essential-and-so-loathed.asp)\-approved methods for calculating your distributions from a SEPP when you set up the account:

*   [Amortization](https://www.investopedia.com/terms/a/amortization.asp)
*   [Annuitization](https://www.investopedia.com/terms/a/annuitization.asp)
*   [Required minimum distribution (RMD)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp)

Each results in a different calculated annual distribution. Your withdrawal amount is pre-determined and unchanged each year, at least with two of the three methods.

Choose the method the IRS recommends that best fits your financial situation. You can change this method once during the plan's lifetime. If you cancel the plan before meeting the minimum [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp), you'll owe the IRS the waived penalties plus interest.

> **Warning**
>
> You cannot use a 401(k) that you hold at your current employer under a SEPP plan.

## Comparing IRS-Approved SEPP Calculation Methods

There are three different methods approved by the IRS to determine withdrawals from your SEPP plan. We discuss them below in a little more detail.

### Amortization Method

With the amortization method, your annual payment remains the same each year. It's calculated using your life expectancy, or your [beneficiary's](https://www.investopedia.com/terms/b/beneficiary.asp), and an interest rate no higher than 120% of the federal mid-term rate.

### Annuatization Method

As with the amortization method, the distribution you must take under the [annuitization method](https://www.investopedia.com/terms/a/annuitizationmethod.asp) is also the same each year. The amount is determined by using an [annuity](https://www.investopedia.com/terms/a/annuity.asp) based on your age, your beneficiary's age (if applicable), and a chosen interest rate with the same IRS guidelines as with amortization. The annuity factor is derived using an IRS-provided [mortality table](https://www.investopedia.com/terms/m/mortality-table.asp).

### Required Minimum Distribution (RMD) and SEPP

Using the RMD method, the annual payment is determined by dividing the [account balance](https://www.investopedia.com/terms/a/accountbalance.asp) by the life expectancy factor of you and your beneficiary, if applicable. Under this method, the annual amount must be recalculated annually and, as a result, will change from year to year. It also generally results in lower annual withdrawals than the other methods.

> **Important**
>
> Early withdrawals under substantially equal periodic payments are made possible under IRS Rule 72(t). The rule allows individual taxpayers with early access to their retirement accounts without incurring any penalties.

## Weighing the Advantages and Drawbacks of SEPP Plans

### Advantages

A SEPP plan benefits those who want or need to access retirement funds early. It provides you with a steady stream of income, penalty-free, in your 40s or 50s to help tide you over between the end of a career (and a regular paycheck) and the arrival of other retirement income.

At 59½, you can withdraw additional funds from your retirement accounts without penalty. By your late-60s, you'll qualify for full benefits from [Social Security](https://www.investopedia.com/social-security-4427727) and perhaps a defined-benefit pension.

SEPP restrictions last until the latter of five years or when you turn 59½. For example, an IRA owner who took SEPPs at 40 would have to abide by the restrictions for almost 20 years. On the other hand, an IRA owner who begins SEPPs at age 58 would only have to continue until 63. These five years are measured from the date of the first [distribution](https://www.investopedia.com/terms/d/distribution.asp) and end exactly five years from that date. It does not end after the fifth distribution is made.

### Disadvantages

A drawback of the SEPP program is its inflexibility. Once you begin a SEPP plan, you must stay with it for the duration. This can potentially be decades if you begin the plan in your 30s or 40s.

You have little to no leeway to alter the amount you can withdraw from the fund each year and quitting the plan is hardly an option. Ending your SEPP early results in penalties and interest. The same sanction may also apply should you miscalculate and fail to make the necessary [withdrawals](https://www.investopedia.com/terms/w/withdrawal.asp) within any one year.

Starting a SEPP also has implications for your financial security later in retirement. Starting a SEPP means you must stop contributing to that retirement account, preventing the balance from growing through new contributions. Early withdrawals make you miss out on potential tax-free compounded earnings and savings.

Pros

*   Steady pre-retirement income stream
    
*   Penalty-free withdrawals up to age 59½
    
*   Five-year period ends five years after the first distribution
    

Cons

*   Inflexiblity
    
*   Withdrawal amount can't be altered
    
*   Can't quit the plant
    
*   Account balance doesn't grow
    

## What Is a Substantially Equal Periodic Payment Program?

A substantially equal periodic payment program allows individual taxpayers to withdraw from their retirement accounts before they turn 59½ without facing any penalties. Withdrawals can be made from IRAs or employer-sponsored plans like a 401(k) as long as you are no longer employed with the company. Payments or distributions are made from the account either for five years or until you turn 59½—whichever comes later.

## When Can I Start Making Withdrawals From a SEPP Plan?

You can begin making withdrawals from a SEPP plan before you turn 59½. Keep in mind that you must take these payments according to one of the three calculations set up by the IRS. These are the amortization, annuitization, and RMD methods—each leaving you with a different annual distribution. The method you choose should suit your financial situation.

## Can I Take SEPP Withdrawals From My 401(k)?

Yes and no. You can make withdrawals from your 401(k) through a SEPP program if you are no longer employed with the company. This means you cannot take any money from your account if you still work for the employer that sponsors the plan.

## Are There Any Penalties Associated With SEPP Plans?

There are generally no penalties associated with SEPP plans. But you will be on the hook for penalties and interest if you cancel the plan before you reach the minimum five-year holding period or before you turn 59½—whichever comes later.

## Is a SEPP Wise If I Only Need Quick Cash?

No. SEPP plans are designed to provide you with a regular stream of income from for five years. So, this isn't the best option if you need money just once or for a specific purpose, such as an emergency home repair. To meet these needs, consider a regular or hardship withdrawal from a retirement account if you qualify and only if it makes sense, or other avenues, such as your regular savings or a loan.

## The Bottom Line

SEPP plans offer a way to access retirement funds early without penalty, adhering to IRS rules. They allow penalty-free withdrawals from retirement accounts before age 59½, provided the withdrawals follow specific IRS rules and use one of three approved calculation methods: amortization, annuitization, or required minimum distribution (RMD). These withdrawals must continue for at least five years or until age 59½, whichever is longer. However, this program is inflexible as any deviation can lead to penalties, so it's crucial to carefully evaluate whether a SEPP plan aligns with your long-term financial goals before committing. Always consider consulting a financial advisor for personalized guidance on SEPP plans.

> **Article Sources**
>
> 1.  IRS. "[Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590b.pdf)." Page 25.
>     
> 2.  IRS. "[Retirement Topics: Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions)."
>     
> 3.  IRS. "[Internal Revenue Bulletin: 2022-5](https://www.irs.gov/irb/2022-05_IRB)."
>     
> 4.  IRS. "[Sub](https://www.irs.gov/irb/2022-05_IRB)[stantially Equal Periodic Payments](https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments)." Select "9. What happens if the taxpayer modifies a SoSEPP by taking an annual amount that is different from the annual amount determined under the method originally established?"
>     
> 5.  IRS. "[Retirement Topics - Significant Ages for Retirement Plan Participants](https://www.irs.gov/retirement-plans/retirement-topics-significant-ages-for-retirement-plan-participants)."
>     
> 6.  Social Security Administration. "[Starting Your Retirement Benefits Early](https://www.ssa.gov/benefits/retirement/planner/agereduction.html)."
>     
> 7.  The Tax Adviser. "[Substantially Equal Periodic Payments from an IRA](https://www.thetaxadviser.com/issues/2008/oct/substantiallyequalperiodicpaymentsfromanira.html)."