Substantially Equal Periodic Payments
Substantially Equal Periodic Payments Definitions
- Substantially Equal Periodic Payments (SEPP)
- The rules for these distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% tax penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59-1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:
- Required minimum distribution (RMD) method: This is the simplest method for calculating your SEPP, but it also produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
- Fixed amortization method: With this method, the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table or joint life expectancy with your oldest named beneficiary.
- Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per month beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer. For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8% percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the Annuity 2003 Mortality Table, which is a non-sex based mortality table and an acceptable Mortality Table for the IRS. Please note that your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.
The use of the Annuity 2003 Mortality Table was introduced in the Revenue Ruling 2002-62 on October 3rd, 2002. Prior to this ruling the UP-1984 Mortality Table was used to calculate your annuitized distribution. The new mortality table has been updated to accommodate longer life expectancies.
In addition, on October 3rd, 2002, the IRS ruled that you could change your distribution type one-time without penalty from the Annuitized or Amortized methods to the Life Expectancy method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses, the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more important exception please see Revenue Ruling 2002-62 on www.treasury.gov.
It is important to remember that while distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement.
- Distribution type
- There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the 'Fixed Amortization' or the 'Required Minimum Distribution' methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details). The three life expectancy options are:
SEPP Life Expectancy Options Uniform Lifetime This is a non-sex based table developed by the IRS to simplify minimum distribution requirements. The uniform lifetime table estimates joint survivorship, but does not use your beneficiary's age to determine the resulting life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. Single Life Expectancy This is a non-sex based life expectancy table. This table does not use your beneficiary's age to calculate your life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. Choosing single life expectancy will produce the highest distribution of the three available life expectancy tables. Joint Life Expectancy This is also a non-sex based life expectancy table for determining joint survivorship using your oldest named beneficiary.
- Current balance
- The current account balance used to determine the distribution. For the RMD method, the balance on at the end of the previous year is used.
- Owner name
- Please enter the account owner's name.
- Owner birthdate
- Please enter the account owner's birthdate. We use this to calculate your age as of 12/31 of the current year. This age is then used for life expectancy calculations
- Name of account
- Please enter the name of the account for this analysis.
- Plan type
- Please enter the plan type. The plan type will not affect the calculations, it is used for descriptive purposes only.
- Previous year ending value
- The account balance as of 12/31 of the previous year. This is only used for the RMD method, the other methods use the current value of the account.
- Hypothetical Interest rate
- This is any rate less than 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins. The current 120% mid-term rate can be found on FieldNet under Products and Marketing, Mutual Funds, Substantially Equal Period Payment (SEPP) assumed rates.
It is important to note that the associated law that created these distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments (SEPP) throughout your lifetime by using an unreasonably high interest rate.
Withdrawals setup prior to January, 2003, had some flexibility in the choice of the reasonable rate to use. However, in 2002, the IRS issued new rules stating that only rates under 120% of the Federal Mid-Term rate would be considered reasonable. You are now required to use a rate that is no more than 120% of the Federal Mid-Term rate.
- Beneficiary name
- Please enter the beneficiary's name.
- Beneficiary birthdate
- Please enter the account beneficiary's birthdate.