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Q. An individual started a substantially equal periodic payment (SEPP) / 72(t) program from his IRA three years ago.  This year, he withdrew more than the amount allowed under the SEPP. I understand this has ‘busted’ the SEPP.

1. How much penalty will he owe?
2. He still needs SEPP amounts to cover his living expenses. Should be continue the SEPP?

A 1. He will owe the IRS all of the 10% early distribution penalties that were waived under the SEPP.  That is, he will owe the 10% penalty for SEPP amounts that were made during the three year period and any SEPP amounts taken under the program this year. In addition, he will owe any interest that is assessed by the IRS on those penalties.  The interest is usually assessed from the year that the SEPP started.

A 2. Since he has modified (violated the terms of) the SEPP, that SEPP should not be continued. He may start a new SEPP if he still needs income from his IRA on a steady basis. Before starting the SEPP, the he may want to consider the following :

• Whether it makes sense to split the IRA into two accounts, so that the SEPP is taken from one IRA and the second IRA is available in the event he needs to make ad-hoc withdrawals. Withdrawals made from the second IRA would not affect the SEPP. The reverse calculator at the following link can be used to determine how much is needed to produce pre-determined SEPP amounts http://www.72t.net/Sepp/Irc72tReverseCalculator.aspx
• The number of years that he will need to continue the SEPP. Bearing in mind that a SEPP must continue for five-years, or until he reaches age 59 1/2, whichever is longer
• Does it make better sense to take ad-hoc withdrawals and pay the penalties, instead of being locked into a scheduled payment. If he really needs that amount of income each year, and his retirement account is his only source of that income, then it seems he has no choice.

He may want to visit the SEPP forum at http://www.72t.net/Discussion/ViewPosts.aspx?A=2 . This is where the best SEPP experts meet to engage in SEPP related discussions.

For more on SEPP / 72(t) Payments see the article: Substantially Equal Periodic Payments

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