Your 56-year-old client lost her job last year and needs additional income until she’s back at work. Her IRA accounts have large balances but she doesn’t want to incur the 10 percent penalty for pre-age 59 ½ distributions and she can’t qualify for the usual penalty exemptions.
The substantially equal periodic payment (SEPP) exception could be a viable solution The SEPP calculator at BankRate.com can help you calculate qualifying payouts; the IRS also provides guidance. Nonetheless, it’s a potentially complex decision. Your client can choose from three distribution methods and any violation of the compliance regulations will trigger penalties.
LifeHealthPro asked April Caudill, JD, CLU, ChFC, AEP, senior attorney advanced planning with Northwestern Mutual in Milwaukee, Wisconsin, for her insights on helping clients make the right decisions with SEPPs. Here are her emailed responses.
LifeHealthPro: How do SEPPs work?
April Caudill: SEPP stands for series of substantially equal periodic payments.
SEPPs are an exception to the 10 percent penalty on early distributions from IRAs and other qualified accounts. Basically a SEPP provides access to retirement funds penalty-free prior to age 59 ½, if certain very stringent requirements are met. After the client reaches age 59 ½, the penalty no longer applies, but an already-started SEPP might be required to continue if the payout has not met the minimum 5-year requirement.
With one exception, which I discuss below, the SEPP cannot be modified until the later of two events occurs: the client either reaches age 59 ½, or completes five years of payouts. If the payout is modified before this point, the 10 percent penalty is triggered on the entire payout, all the way back to the year it began.