72(t) Articles

How do you Calculate Substantially Equal Periodic Payments?

When it comes to retirement planning, understanding substantially equal periodic payments (SEPPs) is essential. SEPPs are a type of retirement plan strategy  that allows you to withdraw money from your retirement accounts without incurring the 10% early withdrawal penalty normally associated if under age 59 ½ . In this blog post, we’ll discuss how to calculate SEPPs and why 72(t) SEPP can be beneficial for your retirement planning.

What are Substantially Equal Periodic Payments?

A “series of (substantially) equal periodic payments,” or SEPP, refers to a set of regular withdrawals from a retirement account that are taken at fixed intervals, such as monthly or annually, and in equal amounts. The IRS 72(t) SEPP rules state that income paid from your IRA must be made for a minimum of five years or until the account holder reaches age 59 1/2, whichever is later. The IRS is very clear on this 72(t) SEPP rule. 

The purpose of requiring a series of equal payments is to ensure that the account holder is not simply taking a lump sum withdrawal from their retirement account to avoid the early withdrawal penalty. By committing to a series of equal periodic payments, the account holder is agreeing to receive a steady stream of income from their retirement account over the states and required period of time.

The amount of each payment can be calculated using one of three IRS-approved methods: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, or the Fixed Annuitization method. Each method has its own set of rules for calculating the payment amount, but all three methods are designed to ensure that the payments are substantially equal and will comply for the required income based on the IRS 72(t) calculator rules. 

How Do You Qualify for SEPPs?

In order to execute a  SEPPs, you must follow certain IRS 72(t) rules. First, you must be under age  59 ½ years old or have a financial hardship that qualifies as an exception to the 10% early withdrawal penalty. Additionally, you must have had a qualified, pre-tax retirement plan in place prior to withdrawing funds under this IRS 72(t) rule. Finally, your withdrawals must be made in substantially equal periodic payments over your life expectancy or over the joint life expectancy of yourself and your designated beneficiary.

How Do You Calculate Substantially Equal Periodic Payments?

Calculating SEPPs can be complicated but there are several IRS 72(t) SEPP rules and parameters that must be followed. The basics are:

  1. Payments aka Income must be paid out to the IRA account owner for a minimum of 5 years or until Age 59 ½ whichever is longer. 
  2. The IRS rules state that there are (3) methods for calculating the SEPP. 
  3. An approved IRS interest rate must be used. 
  4. An approved life expectancy table must be used. 
  5. A 72(t) friendly custodian who will properly code the 72(t) distributions is preferred in order to alleviate an unnecessary aggravation coke tax time each year.

Benefits of Substantially Equal Periodic Payments

One of the biggest benefits of using SEPPs is that it allows you access to funds before reaching age 59 ½ without having to pay the 10% early withdrawal penalty. Additionally, if structured correctly, SEPPs can provide tax-deferred growth on any remaining funds in your account after  you reach age 59 ½ or beyond after the IRS 72(t) commitment when all remaining funds become available without any penalties due upon withdrawal. Finally, by structuring withdrawals in this way, it can help ensure that funds are not depleted too quickly which could leave retirees without enough money during their later years in retirement when expenses tend to increase significantly due to increasing living expenses, health care costs and other factors.

Overall, understanding how to calculate substantially equal periodic payments is essential for anyone looking to access their retirement funds before reaching age 59 ½ without incurring  penalties upon withdrawal. By following these guidelines and working with a knowledgeable, competent and experienced financial advisor, retirees & pre-retirees  can ensure they have enough money throughout their entire retirement while also taking advantage of tax-deferred growth opportunities on any remaining funds in their accounts until they reach the time when all remaining funds become available without any additional penalties due or negative consequences upon withdrawal.


Unfortunately, most financial advisors or DIY providers know much about this strategy and do NOT provide advice and counsel in this specialized area of financial planning. 

A quick phone call will help you determine if this is right for you