This article contains the actions others have taken in the past which have been detrimental to their SEPP Plans. I expect this list will continue to grow as time goes on and more early retirees take advantage of the 72t exceptions. Each action listed below will be the subject of its own article shortly. The SEPP (Substantially Equal Periodic Payments) exception of the IRC Section 72t is the most commonly discussed, so the article has a bent towards that subject.
Disclaimer: While I’ve successfully financed my early retirement with my 72t SEPP plan, I am not an accountant, a financial advisor, or the IRS and as such the actions below are not intended to be a complete reference. My process may be inaccurate, I may have misunderstood the law, or I may have missed an important item. Please use this as a guide to understand the major faux pas you want to refrain from in taking early distributions.
- DO NOT take a distribution that is larger than your planned annual distribution. Once taken, a SEPP distribution generally cannot be undone or reinvested into the account. You will owe a 10% penalty on all prior years’ distributions, plus retroactive interest.
- DO NOT contribute to a retirement plan that has an active SEPP. The account balance can only increase due to gains in the account. No additional funds can be added to the account after the SEPP is started.
- DO NOT change the retirement account(s) you withdraw from. You can move to another brokerage using a trustee-to-trustee transfer, but you can’t substitute one account for another if the first is “getting low”.
- DO NOT use calculators that allow you to use any “reasonable” interest rate in calculating your annual distribution amount. Since 2002 interest rates for SEPP calculations are limited to the 120% federal midterm rate for the current month or either of the two prior months. The rate has varied between the low of 1.01% in 2012 to a high of 6.27% in 2006, though it has not been above 3.69% since 2009.
- DO NOT take distributions after December 15, if at all possible. Leave two weeks to double and triple check your distributions year-to-date and make corrections if the amount distributed isn’t exactly equal (to the penny!) to the distribution amount documented in your plan.
- DO NOT begin distributions until you have full agreement from a knowledgeable accountant and financial advisor.
Do you have anything to add to the list of things NOT to do? Please share in the comments below.