72(t) Articles

Should I Take a SEPP? Understanding and Calculating Substantially Equal Periodic Payments

Planning for retirement is a critical aspect of financial management. It involves making decisions that will impact your financial stability in the future. One such decision is whether or not to take a Substantially Equal Periodic Payment (SEPP). This blog post aims to provide you with comprehensive information about SEPP, its calculation, and whether it’s the right choice for your retirement plan.

What is a Substantially Equal Periodic Payment (SEPP)?

Before we delve into whether you should take a SEPP, let’s first understand what it is. A Substantially Equal Periodic Payment (SEPP) is one of the ways you can withdraw money from your retirement account before reaching the age of 59 ½ without incurring the usual 10% early withdrawal penalty. This rule applies to most retirement accounts like traditional IRAs, 403(b) and 401(k)s.

The Internal Revenue Service (IRS) allows these early withdrawals under Rule 72(t), provided they are part of a Series of Substantially Equal Periodic Payments over your life expectancy or the joint life expectancies of you and your beneficiary.

Understanding SEPP Calculation

The IRS provides three methods for calculating your SEPP: the Required Minimum Distribution method, the Fixed Amortization method, and the Fixed Annuitization method. The SEPP calculation varies depending on which method you choose.

1. The Required Minimum Distribution Method: This is the simplest method where your annual payment is determined by dividing your account balance on 12/31 each year by an appropriate life expectancy factor as provided by IRS tables.

2. The Fixed Amortization Method: This involves amortizing your account balance over your life expectancy at an interest rate not exceeding 120% of the federal mid-term rate.

3. The Fixed Annuitization Method: This uses an annuity factor to calculate annual payments. The annuity factor is derived from an IRS mortality table and an interest rate not exceeding 120% of the federal mid-term rate.

Each method has its pros and cons, and the choice depends on your individual financial needs and circumstances.

Pros and Cons of Taking a SEPP

Before deciding whether to take a SEPP, it’s crucial to weigh the advantages against the disadvantages.


1. Early Access to Retirement Funds: If you need access to your retirement funds before age 59 ½, a SEPP allows you to do so without incurring the 10% early withdrawal penalty.

2. Flexibility: You can choose from three different calculation methods, each offering different payment amounts and structures.


1. Commitment: Once you start a SEPP program, you must continue it for a minimum of  five years or until you reach age 59 ½, whichever comes later. Failure to adhere to this rule may result in penalties.

2. Limited Changes: After choosing a calculation method, changes are limited and can result in penalties, if not done correctly.

3. Market Risk: If your retirement account is invested in volatile markets, taking regular withdrawals could deplete your savings faster than anticipated.

Should I Take a SEPP?

The decision to take a SEPP should be based on careful consideration of your financial situation and future needs. If you need income before reaching age 59 ½ and have no other sources without penalties or taxes, then a SEPP might be an excellent option for you.

However, remember that once started, it’s challenging to make changes or stop the payments without incurring penalties. Therefore, it’s advisable to consult with a competent & experienced financial advisor who can educate & guide you through the 72(t) SEPP process and help determine if this is the best course of action for your specific circumstances.


Taking a Substantially Equal Periodic Payment (SEPP) is one way of accessing your retirement funds early without penalties. However, it’s a decision that requires careful thought and planning. Understanding the SEPP calculation methods and considering the pros and cons can help you make an informed decision. Always consult with an experienced financial advisor to ensure that you’re making the best decisions for your financial future.

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