Definition
An IRS exception that lets you take penalty-free withdrawals from an IRA or a former employer's 401(k) before 59½ by committing to a fixed series of annual payments calculated from your account balance and life expectancy using one of three IRS-approved methods. Income tax still applies. The schedule must continue for five years or until you reach 59½, whichever is longer.
Why it matters
SEPP is the early-retirement tool of last resort because it is rigid: change or stop the payments early and the IRS charges the 10% penalty retroactively on every withdrawal taken, plus interest. Splitting an IRA first so that only part of it is locked into the schedule is the usual way to keep some flexibility.
Example
A 50-year-old with $500,000 in an IRA rolled over from an old 401(k) sets up a 72(t) schedule that, under the chosen method, pays about $22,000 a year. She must take that amount every year until she turns 59½, nearly a decade, and cannot add to or draw extra from that IRA. Taking $30,000 in year six instead would trigger the penalty on all $110,000 already withdrawn, about $11,000, plus interest.
Put it into practice
Related terms
Rule of 55Roth conversion ladderIndividual retirement account (IRA)FIRE (Financial Independence, Retire Early)
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.