Ask an Advisor: My Wife and I Want to Retire Early. How Many Different SEPPs Can We Have? (2024)

My wife and I plan to retire before age 59 ½. How many different 72(t)s can a household utilize? For example, if I have two traditional IRAs at two separate brokerages, can I take substantially equal periodic payments from each or do I need to consolidate them into one first? Since we file our taxes jointly, can my wife and I each use a 72(t) on our IRAs?

– Don

The quick answer to both of your questions is yes. You can take substantially equal periodic payments (SEPP) from more than one IRA. And two spouses can each take SEPPs from their own IRAs. The IRS guidelines specify that a taxpayer cannot have more than one SEPP for a single account, so you won’t be able to have more than one series of payments from the same IRA.

Practically, though, a strategy of doing this with multiple retirement accounts may not make sense based on the strict IRS rules that govern SEPP distributions. Talk with a financial advisor before creating your SEPP plan to make sure you don’t end up facing stiff IRS penalties.

How Section 72(t) Affects Retirement Account Distributions

There’s a special section of the Internal Revenue Code that discusses penalty-free access to retirement plans like IRAs and 401(k)s before age 59 ½.Without these exceptions, money you take out before age 59 ½ will be subject to regular income taxes plus a 10% early withdrawal penalty. Those penalties can add up and more quickly deplete your retirement savings.

The exceptions include things like:

Anyone with an IRA can set up a SEPP, but you can typically only do this with a 401(k) if you no longer work for that company. And if you decide to go this route, make sure you fully understand and comply with all of the IRS requirements to avoid even steeper penalties. (Consider speaking with a financial advisor about the best strategies for your own retirement.)

How SEPPs Work

Just like the name indicates, you can take a series of substantially equal periodic payments – or SEPP – from your retirement account without facing the 10% early withdrawal penalty. The payments have to be taken at least annually, but you can break them up into multiple withdrawals during the year as long as the total is the exact amount of that year’s SEPP. Proper SEPP withdrawals won’t be subject to early withdrawal penalties but they will be taxed normally based on your particular income tax situation.

Whether or not you still need them, you must take these payments for at least five years or until you turn 59 ½, whichever occurs later. For each retirement account you have, you can only have one SEPP in effect. And you can’t make any changes to the arrangement except in the case of death or disability.

Once you’ve begun the SEPP process on any IRA or 401(k) account, you also cannot take any additional money out of the same account or put any money into it. Doing that invalidates the SEPP, reinstates the early withdrawal penalties for all years and tacks on an extra recapture tax. (A financial advisor can help you determine whether a SEPPs withdrawal strategy is appropriate for you.)

Calculating SEPP Withdrawals

When it comes to calculating your SEPPs, you have three IRS options:

All three options require using a life expectancy or mortality table as specified by IRS Notice 2022-6. If interest is involved in the calculation, use either 120% of the federal mid-term rate (also called the applicable federal rate) preceding the first withdrawal or 5% – whichever is greater.

(These calculations can seem confusing, so it makes sense to work with a financial advisor to work out which method and rate assumptions will best suit your needs.)

SEPPs by the Numbers

Looking at an example with numbers can clarify all of the IRS SEPP lingo. Let’s say our taxpayer, Denise, has just turned 50 and would like to begin taking a SEPP in 2024. Her IRA balance as of Dec. 31, 2023 was $500,000. She chooses an interest rate of 4% and uses her single life expectancy of 36.2 years.

Her annual payments under each method would be:

Denise needs to choose which method to use over the next 9 ½ years to meet her current needs. She’ll also need to consider her future retirement needs, other income streams and tax situation before deciding. If this were Denise’s only available retirement account, she might choose to split her SEPPs into more than one payment to give her more financial flexibility.

If circ*mstances change, Denise could make a one-time switch in calculation methods. But she would still be required to take her SEPP withdrawals or risk significant IRS penalties.

Common Mistakes Taxpayers Make With SEPPs

If you decide to use the SEPP method to take money out of your retirement account before age 59 ½, be aware of these common mistakes. Any one of them can invalidate your SEPP, causing additional taxes and penalties:

(A financial advisor may be able to help you avoid these costly mistakes and potentially find alternative options for generating retirement income.)

Bottom Line

Taking SEPP withdrawals can help you avoid paying early withdrawal penalties, but it’s easy to make mistakes that result in even bigger penalties. While you can take SEPPs from multiple retirement accounts, that opens the door to more potential errors and more potential tax issues.

Retirement Planning Tips

Michele Cagan, CPA, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column. Questions may be edited for length and clarity.

Please note that Michele is not a participant in the SmartAdvisor Match platform.

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