Substantially equal periodic payments (SEPP) are one of the exceptions in the United States Internal Revenue Code that allows a retiree to receive payments before age 59 from a retirement plan or deferred annuity without the 10% early distribution penalty under certain circumstances.[1]
The rules for SEPPs are set out in Code section 72(t) (for retirement plans) and section 72(q) (for annuities), and allow for three methods of calculating the allowed withdrawal amount:
The interest rate that can be used in the latter two calculations can be any rate up to 5% per annum, or up to 120% of the Applicable Federal Mid Term rate (AFR) for either of the two months prior to the calculation.[2] SEPP payments must continue for the longer of five years or until the account owner reaches 59.[2] The payments cannot be changed beyond a one-time allowed change from one of the latter two calculation methods to the first or all of the payments received will be retroactively taxable and penalized.[3] [4]
If the retirement account owner withdraws more or less than the amount calculated under the SEPP formula, the 10% early distribution penalty that was waived would apply in all instances (where it was waived under the SEPP program), and interest on those amounts would also apply.