- 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. As of January 1, 2022, life expectancies are calculated with updated life expectancy tables finalized by the IRS in November 2020.
- 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. As of January 1, 2022, life expectancies are calculated with updated life expectancy tables finalized by the IRS in November 2020.
- 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). The calculator uses the Annuity 2003 Mortality Table for 2021. For 2022 and later the updated Life Expectancy and Distribution tables, which were finalized by the IRS in November of 2020, replace the older annuity factors. The annuity factor tables are a non-sex based mortality table. Your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.
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 information on this 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.
For SEPP calculations on or after January 1st, 2022 this calculator has been updated, as required by the Internal Revenue Service (IRS), to use the updated Life Expectancy tables finalized in November 2020. 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:
|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. The tool uses this to calculate your age as of December 31st 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 December 31st of the previous year. This amount is only used for the Required Minimum Distribution (RMD) calculation method, the other methods use the current value of the account. The IRS rules allow for "an account balance to be determined in any reasonable manner based on the facts and circumstances".
The IRS provides an example of a reasonable determination of the account balance for the RMD method. This example is not a definitive rule and not specific to the other methods. The IRS example allows for use of an account balance from any daily value between December 31st (of the year prior to distributions beginning) and the actual date of the first distribution. For subsequent years the value on December 31st of the prior year could be used or the account balance on a date within a reasonable period of the distribution. This calculator assumes you wish to follow the IRS example by using the previous year ending balance for the RMD method.
- Hypothetical interest rate
- In January of 2022, Notice 2022-6 specified a change to what is considered an acceptable interest rate when calculating distributions. Previously the rule set the maximum rate at 120% of the Federal Mid-Term rate. The new rule makes 5% the maximum unless the 120% of the Federal Mid-Term exceeds that amount. The Federal Mid-Term rate to use can be from either of the two months immediately preceding the month in which the distribution begins.
**72TRATE_DEFINITION** Click here for more information about Federal Interest rates.
It is important to note that the associated law that created 72(t)/(q) 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.
- Beneficiary name
- Please enter the beneficiary's name.
- Beneficiary birthdate
- Please enter the account beneficiary's birthdate. The tool uses this to calculate the beneficiary's age as of December 31st of the current year. This age is then used for joint life expectancy calculations.