Substantially Equal Periodic Payments
Substantially equal periodic payments (SEPP) is an IRS provision under IRC Section 72(t) that allows retirement account owners to take a series of calculated distributions before age 59½ without incurring the standard 10% early withdrawal penalty, provided the payments follow one of three IRS-approved calculation methods and continue for at least five years or until the owner reaches age 59½, whichever is later.
The 10% additional tax on distributions from IRAs and qualified plans before age 59½ is one of the primary mechanisms the tax code uses to discourage premature depletion of retirement savings. However, Congress recognized that some individuals may need access to retirement funds before that age without having experienced one of the listed exceptions (such as disability, separation from service after age 55, or qualified medical expenses). The SEPP regime provides a structured pathway to do so.
The IRS has approved three methods for calculating the required annual payment amount. The required minimum distribution method divides the prior year-end account balance by the IRS life expectancy factor for the owner's age, resulting in a payment that varies each year as the balance and factor change. The fixed amortization method amortizes the account balance over the owner's life expectancy using a reasonable interest rate, producing a level annual payment. The fixed annuitization method applies an annuity factor from IRS tables to the account balance, also producing a level annual payment. The amortization and annuitization methods typically produce higher annual payments than the RMD method, and all three methods are acceptable under IRS Notice 2022-6.
Once a SEPP schedule begins, the payment amount and method cannot be changed (except a one-time switch from the amortization or annuitization method to the RMD method is permitted) until the later of five years from the date of the first payment or the date the owner reaches age 59½. Modifying the payments before that deadline — including taking an additional distribution, stopping payments, rolling over the account, or making new contributions — constitutes a modification that triggers retroactive application of the 10% penalty plus interest on all prior penalty-free distributions. This inflexibility is the major risk associated with SEPP programs.
SEPP arrangements are account-specific. An owner can establish a SEPP from one IRA while keeping other IRAs untouched. The account used for SEPP should generally be segregated from other retirement funds to ensure that no unauthorized contributions or distributions disrupt the program. If the account is exhausted before the SEPP period ends, the IRS considers that a modification and can assess retroactive penalties.
SEPP is sometimes called the 72(t) election, referring to the IRC section under which it operates. It is commonly used by individuals who retire early, are self-employed with irregular income, or face financial hardship that requires access to retirement assets before standard retirement age. Given the complexity of the calculations and the severity of the consequences of a modification error, many account owners work with tax professionals when establishing a SEPP.