Rocky Market Choices: Evaluating SOSEPP Changes for Declining IRA Balances

by Prof. Robert Bloink and Prof. William H. Byrnes

Typically, a 10% early withdrawal penalty applies in situations where a retirement plan owner accesses their retirement funds prior to reaching age 59 ½. One exception to the early withdrawal penalty applies when the funds are accessed via a series of substantially equal periodic payments, or “SOSEPP” under IRC Section 72(t). Three permitted methods for calculating the value of the SOSEPP exist—and, generally, once an individual selects their distribution method, they are required to stick with that choice. In a down market where the value of an IRA has declined, individuals who have selected a SOSEPP method may question that choice—simply because the payment amount may now amount to a much larger portion of the overall IRA balance. Today, clients should understand their options for modifying their SOSEPP—being vigilant to follow the rules regarding permissive changes to avoid a potentially significant early withdrawal penalty.

Calculating the Value of a SOSEPP