Early Retirement and IRA SEPP Withdrawals

Early Retirement and IRA SEPP Withdrawals

The current economic recession has changed the retirement plans of thousands of American families in the metropolitan Oklahoma City region. Some families are postponing retirement to avoid drawing from their IRAs; others who are retired are working a part-time job; while another group may be considering early retirement options as their jobs evaporate.

There is some good news for those under the age of 59 who are considering early retirement. People in this age group with an IRA may be able to make penalty-free withdrawals from traditional IRAs under 72(t) distributions. Otherwise early withdrawals from an IRA are subject to a 10% penalty in addition to the income tax.

What is SEPP?

As defined by the IRS code, 72(t) distributions allow "substantially equal periodic payments" (SEPP) to provide income between early retirement and when other sources of income like Social Security, pensions or regular IRA distributions become available. Under IRS rules, SEPP payments must be taken at least once a year in an amount that adheres to IRS calculations and these payments must continue for five years or until age 59, whichever is earlier. IRS calculations are based upon life expectancy from actuarial tables and the amount of money in the IRA.

During this time period no additional contributions to the IRA with SEPP distributions are allowed, but contributions to other IRAs are permitted. The ban on contributions to the IRA lasts for five years and one day before contributions are again allowed.

Finally, SEPP distributions are a commitment. SEPP distributions must continue for five years or until age 59, permanent disability, death or lack of funds in the account. Otherwise, if SEPP payments are discontinued the 10% penalty, plus interest at IRS rates, must be paid on the entire accumulated amount of withdrawals.

Who Benefits from SEPP?

Even with all these requirements SEPP distributions may be attractive to individuals who are at least 54 years of age (five years away or less from regular early retirement), seeking early retirement and intend to use a small amount of their retirement savings during the SEPP period. It is best to consult a financial advisor before using a SEPP option.

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