3713.07 / How can the substantially equal periodic payment exception to the early withdrawal rule help taxpayers who choose to retire early starting in 2023?

Distributions from traditional retirement accounts are subject to harsh penalties on top of ordinary income taxes if the account owner takes a distribution before reaching age 59 ½. While several exceptions to the IRA early withdrawal penalty exist, most of those exceptions are not particularly helpful for those who merely need access to their funds because of an unexpected cash shortfall. On the other hand, one exception is available to all IRA owners, regardless of their circumstances and regardless of the purpose for the distribution. Taxpayers can structure a series of substantially equal periodic payments (SOSEPP) to gain access to their retirement funds without penalty—and for any reason.

SOSEPPs are exempt from the 10 percent early distribution penalty that applies to traditional retirement account distributions prior to age 59 1/2. The IRA owner can set up a series of equal periodic payments (whether the payments are made monthly, quarterly or even annually) and avoid the penalty as long as the SOSEPP remains in place for the longer of (1) five years or (2) the date the recipient reaches age 59 1/2. If the SOSEPP is ended or modified prior to that time, the penalty applies (plus interest).

The SOSEPP payment is calculated based on one of three different options (the fixed annuity option, the fixed amortization option or the RMD option) that mimic a draw-down of the account over the owner’s life expectancy. The most commonly used options are based on the individual’s life expectancy and an interest rate that has historically been based on the federal mid-term rate in effect for either of the two months prior to the start of the SOSEPP schedule (the rate could not exceed 120 percent of that federal mid-term rate).

Beyond those rules, taxpayers are able to structure their payments using a single life expectancy or joint life expectancies of the IRA owner and designated beneficiaries.