Your IRA and 401K accounts are more flexible than you think. Did you know that if you plan on retiring early, you’re still allowed to take withdrawals penalty free from certain retirement accounts?
Substantially equal period payments, or commonly referred to as a SEPP, gives you the ability to withdrawal penalty free from your retirement accounts, think 401K or IRA, before the normal retirement age.
Generally, if you were to take a withdrawal from a retirement account before the age of 59 1/2, there is a 10% penalty plus other tax consequences depending on the type of accounts. (Roth IRA distributions are treated differently than Traditional IRA distributions, but that’s not what’s important here)
A SEPP withdrawal allows you to avoid this penalty by taking substantially equal periodic payments from your retirement account. The periodic payments must continue for at least 5 years or till you reach the age of 59 1/2.
SEPP withdrawals aren’t used for someone who needs short-term access to cash. Substantially equal periodic payments are best used for someone who wants to retire earlier than 59 1/2 or even redistribute their retirement, to still benefit from tax advantage accounts.
I’m not going to get into the details of the different formulas for taking withdrawals or laws regarding SEPP’s (learn more about substantially equal periodic payments here). As a member of Generation Y, you’re a long way away from needing to know that.
The most important thing for you to realize is that, tax advantaged accounts can and should be used even if you plan on retiring early.