Early Withdrawal of an IRA or 401(k) – SOSEPP

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This particular section of the Internal Revenue Code – specifically §72(t)(2)(A)(iv) – is the most famous of the 72(t) provisions. This is mostly due to the fact that it seems to be the ultimate answer to the age-old question “How can I take money out of my IRA or 401(k) without penalty?”

While it’s true that this particular code section provides a method for getting at your retirement funds without penalty (and without special circumstances like first-time home purchase or medical issues), this code section is very complicated. With this complication comes a huge potential for costly mistakes – and the IRS does NOT forgive and forget!

A Series of Substantially Equal Periodic Payments, or SOSEPP is just what it sounds like. You withdraw a specified amount from your IRA or 401(k) every year. The specified amount is not always the same (hence “substantially” equal) but the method for determining the amount is the same year after year. You start your SOSEPP at some age before 59 ½ years of age (or the age that you would otherwise qualify for penalty-free withdrawals), and you must continue those payments for the greater of 5 years or until you reach age 59 ½.

In order to set up your Series of Substantially Equal Periodic Payments (SOSEPP), you must use one of the three methods prescribed by the IRS: Required Minimum Distribution method, Fixed Amortization method, and Fixed Annuitization method (follow the links for more information on each method).

Once chosen, your method can not be changed under most circumstances. There is one situation that provides for a one-time change to your payments, but otherwise the SOSEPP can’t be changed without “busting” the activity. This means that every year the SOSEPP is in effect, you must take exactly the amount in your schedule from your retirement account, no more and no less. Making a change to your withdrawal schedule will result in your owing the 10% penalty retroactively on all payments received to that point, plus interest (this is where the IRS does not forgive).

In addition, once you’ve begun your SOSEPP, you must continue that payment schedule until the later of five years or you reach age 59 ½. Again, this is an area where the IRS doesn’t forgive or give any leeway: if you take additional distributions one day before your five years or 59 ½th birthday, the action will “bust” the SOSEPP, and you’ll be liable for 10% penalty on all distributions from your IRA plus penalties. Obviously this sort of an arrangement should not be taken lightly, and you must keep excellent, flawless records on your withdrawals.

Other facts about SOSEPP:

• You can split your IRA into more than one account, and apply your SOSEPP against only one account, thereby reducing the balance against which your payout method is calculated. This splitting typically is not available for a 401(k) plan, although you could rollover a portion of the 401(k) to an IRA and use a SOSEPP against either account, as long as the plan administrator allows.
• You can have more than one SOSEPP going at a time, using separate IRA or 401(k) accounts and different payout methods for each.
• Your periodic payment will likely change under the minimum distribution method, as it recalculates annually based on the account balance at the end of the prior year.