So – you’ve begun your Series of Substantially Equal Periodic Payments (SOSEPP) from your IRA to satisfy your §72(t) requirement. Allofasudden, something happens that causes you to make a change to your payment – either purposely or through unforeseen circumstances. What happens? You were supposed to keep the same payment for the longer of 5 years or until age 59½. What do you do now?
.Well – first of all, we must understand the timeline associated with an SOSEPP: once begun (notwithstanding the “one-time change” exception which you can read about here), you have to continue those periodic payments without change for the longer of five years or until you reach age 59½.
If you make a change to your periodic payments (other than the one-time change), §72(t)(4) indicates that ALL of your payments, beginning with your first payment under the SOSEPP, will be subject to 1) ordinary income tax (should have already been assessed); 2) the 10% non-qualified withdrawal penalty; and 3) interest on any unpaid tax or penalty, calculated from the date(s) of the disbursal(s) forward to the date you “broke” the SOSEPP.
This Code section should strike fear in the hearts of folks who are considering a SOSEPP. If you think about it, the possibilities for error are numerous. Your brokerage can fail to execute a disbursement the way you directed; you forget to take your withdrawal; you mistakenly take more (or less) than your SOSEPP prescribes… And if it’s been in place for several years, you’ll owe penalties back to the beginning of the plan, plus interest.
It doesn’t take much imagination to envision a scenario where you could be in pretty deep with such an error on your plan. The IRS has no sense of humor when dealing with these cases – not many are overturned.
Sterling Raskie, MSFS, CFP®, ChFC®
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