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Most retirement accounts generally can’t be accessed before you reach age 59½ without incurring a penalty for early withdrawals. However, early retirees can still access their funds by taking what is known as substantially equal periodic payments (SEPP) in an IRA, 401(k), 403(b) or other qualified retirement account without having to pay the 10 percent tax penalty imposed by the IRS.

Here’s how SEPP plans work, the pros and cons and the three methods of calculating payments under the plan.

How substantially equal periodic payments work

If you’re looking to access your tax-advantaged retirement account before age 59 ½ without incurring a 10 percent penalty, you may be able to do that by setting up a substantially equal periodic payment plan. This strategy is not a free ride: you’ll still be responsible for any income taxes on the payments, just not the additional 10 percent penalty that typically applies to withdrawals for individuals under age 59 ½.

You’ll need to abide by a few key rules when using the SEPP strategy, according to IRS Section 72(t):

  • SEPP payments must be substantially equal, meaning they cannot fluctuate or you may lose the ability to receive penalty-free withdrawals. Payments must be based on the taxpayer’s life expectancy or the life expectancy of their beneficiary.
  • You must not be employed at the company that sponsors the retirement account. For example, if you’d like to withdraw from a 401(k), it must be from a former employer.
  • You must take withdrawals from the account for at least five years or until you reach age 59 ½, whichever is longer. So you’ll have to use the plan for at least five years.
  • You may not take any other withdrawals from the account you’re taking the SEPP from.
  • You may not have more than one SEPP plan active for the account in any given year.

If you abandon the SEPP plan before it’s scheduled to end, you’ll be hit with substantial fees. You’ll be forced to pay all the penalties that you otherwise avoided plus interest on that amount.

However, if you deplete the account before making a year’s payment, you are not subject to the penalty for that year or a penalty for failing to complete the SEPP plan.

There are three allowable methods for calculating payments, covered below.

SEPP payment methods

The IRS provides three methods for determining SEPP payments: the required minimum distribution (RMD) method, the fixed amortization method and the fixed annuitization method. Each method has its own rules and guidelines for calculating payments. However, the IRS states that other methods may be acceptable to fulfill the condition of substantially equal payments.

You’re allowed to change the payment method only once during the SEPP plan, and only if you change from the fixed annuitization or fixed amortization model to the RMD model. Here’s an overview:

Required minimum distribution (RMD) method

With the RMD method, the annual payment of a SEPP is based on the account balance from the prior year. The year-end account balance is divided by the life expectancy factor according to IRS guidelines from the Uniform Lifetime Table (found in Publication 590-B) to determine the annual payment.

Fixed amortization method

The fixed amortization method calculates yearly payments using an approved interest rate and life expectancy and is designed to result in an even drawdown of the account balance. With this method, you won’t have to recalculate distributions each year but will simply take out the same amount each year you’re under the plan.

Fixed annuitization method

The formula for this method divides the retirement account balance by a number called the annuity factor. The annuity factor is calculated using some specific information, such as life expectancy and the federal mid-term interest rate. Once you know the account balance and the annuity factor for the first year, you can use the same amount as the annual payment for each following year.

Advantages of a SEPP

Setting up a SEPP has two primary benefits:

  • Financial support: SEPP plans allow individuals to receive a regular income from their retirement without penalties until they reach 59 ½. This plan can help provide financial support during the transition period between the end of a career and the start of other retirement income sources.
  • Avoid the 10 percent penalty: While the IRS generally imposes a 10 percent penalty on early withdrawals from retirement accounts, SEPP plans are an exception (among some others).

Disadvantages of a SEPP

SEPP plans have a few disadvantages that you should consider before deciding to start or stop one:

  • Substantial penalties for canceling the plan: Once you begin a plan, you must continue for at least five years or until you reach age 59½, whichever is longer, or you’ll pay a sizable penalty. If the payments are modified or stopped before the five years are up, your taxes will increase by the amount avoided when starting the SEPP plus interest for the deferral period.
  • Unable to change withdrawal amount: Even if your financial circumstances or life expectancy changes, you’re still stuck with the same payment amount, thus the “equal payments” part of SEPP.
  • Reduces retirement savings: Once you start a SEPP plan, your account balance will decline, reducing your ability to grow your assets. Additionally, once you start withdrawals, you can’t contribute to the retirement account.


  • SEPP plans come with serious disadvantages and therefore should not be treated as a risk-free way to access money. However, if you’re near retirement age and lose your job and have few prospects for replacing the job, you might consider a SEPP plan. Or, if you need a steady stream of income and have no other resources, a SEPP plan might be your best bet. Keep in mind that although you won’t be hit with the 10 percent early withdrawal penalty, you’ll still be responsible for income tax on the withdrawals.
  • If you cancel the plan before the minimum holding period of five years or before reaching 59½ years old, you must pay all the penalties saved by starting the plan, along with interest.
  • Because SEPP plans come with some clear disadvantages, including tax penalties for incorrect calculations or early termination, your best bet is to consult a certified financial planner (CFP). A CFP and a tax expert can help talk you through your options.