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What Is a SEPP Program?


SEPP, which stands for substantially equal periodic payments, is a little-known program that can enable you to withdraw money from your IRA or 401(k) before age 59.5 without facing an early withdrawal penalty. Doing so is permanent, so it may not be the best course of action if you need a short-term cash infusion. Before you commit to a SEPP plan, make sure you’ve considered all the ins and outs and concluded that it’s the best option for your situation. Before accessing your retirement funds, consider speaking with a professional financial advisor who can properly analyze your financial situation.

SEPP Basics

SEPP programs are made possible by section 72 of the Internal Revenue Code, and they serve as one exception to the age requirement for retirement account withdrawals. If you enter into a SEPP program, you’ll start to receive annual payouts from your retirement account for either five years or until you reach age 59.5, whichever comes later.

If you want to end these payouts before that point, you’ll have to pay the early withdrawal penalty that you previously avoided. Payouts can be fixed or they can vary from year to year, and they’re calculated in one of three ways. We’ll explore each method in more detail later in this guide.

SEPP programs may seem too good to be true, but they also have their drawbacks. Once you begin a SEPP program, you’ll have to stop contributing to your retirement account, and you won’t be able to make any distributions other than your annual payout. Additionally, you can’t set up a SEPP program for an employer-sponsored account like a 401(k) unless you no longer work for that employer. Since an individual retirement account (IRA) isn’t attached to an employer, it isn’t subject to this stipulation.

Who Benefits From the SEPP?


If you need every penny of your retirement funds to save yourself from bankruptcy, the SEPP isn’t the option for you. This is because you’ll only be able to access a portion of your funds in the first year of the SEPP and in each subsequent year of the program. SEPPs aren’t very flexible. Once you commit to an SEPP you’ll be locked into a set period, during which time you can’t change your mind and take more money out of your retirement account – unless you want to forfeit the penalty waiver that the SEPP provides.

If you back out of the SEPP before it ends because you decide you want your money in a lump sum, you’ll owe taxes and penalties on any annuitized distributions you took after setting up the SEPP. That’s why the SEPP is best for people who need money to live on, not money to pay off one huge expense like a house that’s in danger of foreclosure or massive uncovered medical expenses.

As we mentioned, SEPPs are often used by people who have been laid off from jobs they had for a long time. It can be an alternative to claiming unemployment benefits or looking for another job. Because it’s tough to find a new job in your 50s, the SEPP is a necessary stop-gap for some people who need income and don’t want to face early withdrawal penalties just because their career hasn’t lasted as long as they hoped it would.

Setting up a SEPP Program

Once you’ve decided that a SEPP is right for you there are three options for you to choose from. To figure out how much money you’ll get during each year of the SEPP program, you can use one of three methods: the required minimum distribution method, the amortization method or the annuitization method. Whichever method you choose, you’ll need to consult a mortality table or life expectancy table to tell you how many more years you can expect to live.

Use that life expectancy number, an interest rate and the number of funds you have to convert to a SEPP to calculate your annual income. According to IRS SEPP rules, “you may use any interest rate that is not more than 120% of the federal mid-term rate published in IRS revenue rulings for either of the two months immediately before distributions begin.”

If this sounds complicated, it’s because it is. If you’re struggling, you can contact the administrator of your retirement plan or your tax adviser. Either can help you set up your SEPP program. You might also seek the advice and guidance of a financial advisor to help you set it up.

Once you set it up, you’ll have to use the SEPP for at least five years or until you reach age 59 1/2, whichever time period is longer. Once the length of those two periods ends, you can change the amount you receive or stop the SEPP. It’s important to abide by the rules of the SEPP. That way, you don’t find yourself on the hook for the full early withdrawal penalty just because you failed to take the last required SEPP payment.

The Bottom Line


In a perfect world, no one would need to access their retirement funds until they reach the age of retirement. However, it’s nice to know that the IRS provides a tax-advantaged, penalty-free option for those who find themselves in a tough spot before age 59 1/2 and have to dip into their retirement funds. Like any other important financial decision, make sure you’ve thoughtfully considered all the potential options and their consequences.

Tips for Getting Retirement Ready

  • You can consider working with an advisor who can work with you to determine your retirement income needs. They can also help you determine the best savings, tax or investment strategies to get you there. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • You may want to figure out how much you’ll need to save to retire comfortably. Once you have a sense of your savings needs, you can use tax-advantaged retirement accounts like a 401(k) and Roth IRA to get you there.

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