Substantially equal periodic payments are withdrawals from qualified retirement plans that take place early, but are not subject to any type of early withdrawal or tax penalties. Payments of this type, typically referred to as SEPPs, are usually associated with retirement plans for citizens of the United States. Plans such as an Individual Retirement Plan are structured to allow withdrawals prior to the age of 59 ½ without any type of penalty involved. Employer sponsored plans such as 401 (k) plans are usually not eligible for inclusion in a SEPP strategy.
The most common reasons for withdrawing funds from a retirement plan have to do with unanticipated financial hardship. Simply withdrawing the funds would mean paying any early withdrawal fees imposed by the plan itself, plus paying any taxes and penalties due to federal or state tax agencies. With a substantially equal periodic payments program, it is possible to avoid all those taxes and penalties while still having access to the funds while recovering from whatever circumstances led to the financial reversal.
The structure of a SEPP plan calls for the issuance of annual disbursements over a period of at least five years, or until the recipient reaches the age of 59 ½, whichever event occurs last. This is because current regulations put in place by the Internal Revenue Service in the United States requires that the substantially equal periodic payments program continue for a minimum of five consecutive years. In the event that the plan is canceled before the completion of this five-year minimum period, all penalties and fees that were previously waived must be paid, plus interest on the balance of those fees and penalties.
Since participation in a substantially equal periodic payments program requires a commitment of at least five years, utilizing this type of strategy may not be the best way to go about managing a short term financial crisis. The age at which the SEPP plan is important, since someone who is in his or her early fifties may need the funds for financial emergencies, and will fulfill the five years shortly before reaching 59 ½ years of age. In this scenario, transitioning the retirement plan funds into a substantially equal period payments plan would make sense.
In contrast, an individual in his or her early forties would want to consider other means of managing the financial reversal. Since current regulations require that the substantially equal periodic payments plan remain in force for five calendar years or until the recipient reaches the age of 59 ½, whichever event comes last, this means that someone who is 42 years of age would have to remain in the plan for a minimum of 17 ½ years in order to avoid paying penalties and interest on the disbursements. Under the circumstances, the amount of the annual disbursements may or may not be worth the trouble.
There are a few exceptions that make it possible to utilize a substantially equal periodic payments strategy and avoid penalties. A recipient who becomes disabled prior to that five-year minimum would be exempt from paying the penalties and fees. Should the balance of funds in the plan become depleted before five years have passed, there is also no assessment of penalties. This is true whether the funds are simply exhausted or the balance is reduced due to loss in market value of the underlying assets. If the recipient should die before the five-year minimum period is fulfilled, no penalties or fees are assessed.