Substantially equal periodic payments (IRS)

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Substantially equal periodic payments (SEPP) are one of the exceptions in the United States IRS Code that allows receiving payments without penalty from a retirement plan or deferred annuity before the usual 59 1/2 age restriction under certain circumstances. The rules for SEPPs are set out in IRS code section 72(t) (for retirement plans) and 72(q) (for annuities), and allow for three methods of calculating the allowed withdrawal amount.

• Required minimum distribution method, based on the life expectancy of the account owner using the IRS tables for required minimum distributions
• Fixed amortization method over the life expectancy of the owner
• Fixed annuity method using an annuity factor from a reasonable mortality table

The interest rate that can be used in the latter two calculations has been fixed at one not more than 120% of the Applicable Federal Mid Term rate (AFR) for either of the two months prior to the calculation. SEPP payments must continue for the longer of five years or until the account owner reaches 59 1/2. The payments cannot be changed beyond a one time allowed change from one of the latter two calculation methods to the first or all of the payments received will be retroactively taxable and penalized.

[edit] References

• Department of the Treasury, Revenue Ruling 2002-62
• IRS Publication 590 (2005), Individual Retirement Arrangements (IRAs)