Early Retirement Distribution: How to Get the Most Out of Yours

You can set up a SEPP plan with any qualified retirement account except a 401(k) you hold at your current employer. However, there are some very specific rules you’ll need to follow:

• The payments made to you from the IRA must rely on one of three calculation methods. 
• The payments must be made to you annually during the payment years. Payments can be made more frequently, such as monthly, but the total for each year during the SEPP period must meet the payment calculation result for the year or years during the SEPP. 
• Payments must be made for a period of at least five years or until you reach age 59½, whichever is later. 

For example, if you establish a SEPP from your IRA at age 52, you must continue to take withdrawals until you reach 59 ½. If you discontinue or change your SEPP withdrawals before you reach that age, the current year withdrawal is subject to the additional 10% tax unless an exception applies. In addition, the SEPP withdrawals for previous years are retroactively subject to the 10% tax. 

If, however, you begin SEPP withdrawals at age 58, you must continue the withdrawals to age 63 to comply with the 5-year withdrawal requirement. 

To be “substantially equal periodic payments,” your payments need to meet the standards of one of the three calculation methods allowed: 

1. Required minimum distribution method. Under this method, the account balance, the number from the life expectancy table, and the resulting annual payment amount is re-determined each year. 
2. Fixed amortization method. The annual payment for each year is determined by amortizing in level amounts the account balance over a specified number of years determined using a life expectancy table and a chosen interest rate. Under this method, the annual payment is determined once for the first distribution year, and the annual payment is the same in each succeeding year. 
3. Fixed annuitization method. The annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the taxpayer’s age and continuing for the taxpayer’s life. The annuity factor is derived from a mortality table and a chosen interest rate. Under this method, the annual payment is determined once for the first distribution year, and the annual payment is the same amount in each succeeding year.

If you begin distributions in a year using either the amortization method or the annuitization method, you may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years. The change in method will not be treated as a modification. 

Once you make the change, you must follow the required minimum distribution method in all subsequent years until you meet the required number of years under the plan. You may not take any other contributions or distributions from the account from which you are taking distributions during the SEPP period.

If, as a result of following an accepted method of determining SEPP withdrawals, your IRA assets are exhausted, you will not be subject to the additional income tax of 10%. The resulting cessation of payments will not be treated as a modification of the series of payments.