Substantially Equal Periodic Payment Calculations

Pre-59½ Distribution Software - SEPP (Substantially Equal Periodic Payments). Calculation of Pre-59½ Substantially Equal Periodic Payments can be projected with this unique software.

* RMD, Amortization and Annuity factor methods are supported.

* Allows for Reverse Calculations.

* Allows COLA Adjustments

* Updates New AFR values via the internet

* Side-by-side comparisons of all methods.

SEPP
Overview and Purpose
An IRA accountholder is not assessed the 10% additional tax imposed by Code Section 72(t) if he or she is withdrawing money from an IRA pursuant to a “substantially equal periodic payment.”

Your customers and accountholders who most likely will want to use this rule are those who received a large distribution from their Qualified Plan, rolled it over to an IRA, and wish to commence distribution from the IRA before they are age 59½

Substantially equal periodic payments are special distributions and may occur with respect to a traditional IRA or a Roth IRA, but not with respect to a Coverdell ESA.

The rationale of the law apparently is, a person who is not yet age 59½, but who establishes a periodic distribution schedule, should generally not have to pay the 10% additional tax. The law does not require a person to be retired or to be separated from service or to be of a certain age. You will have more and more accountholders wanting to set up such a schedule and considering setting up such a schedule, as they learn about this possibility. But the taxpayer will suffer very harsh tax consequences if he or she fails to comply with the applicable rules.

Be aware that most of the discussion which follows was written for a traditional IRA, but some individuals may wish to take substantially equal periodic payments from Roth IRAs also.

What Distributions Qualify as Substantially Equal Periodic Payments ?
Somewhat surprisingly, Code section 72(t)(2)(A)(iv) does not define the term “substantially equal periodic payments,” nor has the IRS issued a regulation defining this term. The IRS has, however, issued Notice 89-25 and Rev. Rul. 2002-62. In Notice 89-25 the IRS provided three safe harbor methods. That is, if a taxpayer uses any one of these three methods to establish his or her substantially equal periodic payment, then he or she will not owe the 10% additional tax.

All three methods cause a different annual distribution amount, and two of these methods involve the use of an interest rate assumption that must not exceed a reasonable interest rate on the date payments commence. The three methods are as follows:

• 70½ RMD Method: This is the same method used to calculate the RMD for an accountholder age 70½ or older. It must comply with the terms of Code Section 401(a)(9). When this method is used, the withdrawal amount will usually change each year. This method, in the beginning years, will result in the smallest annual distribution amount.
  
• Fixed Amortization Method: This factor is based on amortizing the account balance over a single or joint life and last-survivor expectancy, at a reasonable interest rate determined as of the date that payments begin. When this method is used, the distribution amount will be the same every year.
  For payment schedules initiated after 2002, the fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life or uniform life or joint life and last survivor) and a rate of interest that is not more than 120% of the federal mid-term rate published in revenue rulings by the Service. Once an annual distribution amount is calculated under this fixed method, the same dollar amount must be distributed under this method in subsequent years.
  
• Fixed Annuity Method: The annuity factor is derived from a “reasonable“ mortality table, using a “reasonable” interest rate as determined on the date payments begin. When this method is used, the distribution amount will stay the same every year. This method will calculate the largest amount.

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