Five years or 59-1/2. Suppose, for example, John Smith retires at age 48 and wants to tap his IRA without paying a penalty. He does not have to start by taking out 1/36 of his account in year one and gradually draw down the entire account over 36 years. Instead, he can keep up his SOSEPP for five years or until age 59 1/2,
whichever comes later.
John starts his withdrawals at age 48, so he must continue until 59-1/2. If Tracy James starts at age 56, she must continue until at least age 61. Once you’re past both the five-year and age-59-1/2 hurdles, you can take out as much or as little as you’d like, without paying a penalty.
More or less. The SEPP rules permit you to decide among various methods, which result in different distribution amounts.
Minimum distribution amounts. You may want to take a relatively small amount from your IRA or 401(k), leaving as much as possible in the account to support a long retirement. In that case, you might take 1/36 of the account in year one, if you have a 36-year life expectancy, about 1/35 of the account in year two, etc.
Maximum distribution amounts. The Internal Revenue Service permits you to use an “amortization” method instead. In essence, you project how large your retirement account will grow over the years and take your SOSEPP based on that projected appreciation. Depending on your age and on the level of interest rates in effect at the time you start a SOSEPP, you might be able to take two or even three times as much from your retirement account, penalty-free, as you could with the minimum distribution method. (The IRS also permits an “annuitization” method, but it’s seldom used.)
Using recent interest rates, for example, a 50-year-old using the minimum distribution method would be able to withdraw nearly $11,000 a year from a $500,000 IRA, without owing a 10% penalty. With amortization, he could take out $23,000 or so, penalty-free.
Your accountant or financial adviser should be able to walk you through the calculations so you can choose the appropriate method for SOSEPP withdrawals. Be careful, though.
“Contributing just $1 to an account that has begun these distributions could trigger retroactive penalties plus interest,” says Cortazzo. Withdrawing more or less than the permitted amount can also trigger penalties. Therefore, you should be confident that you’ll maintain your SOSEPP precisely until you pass both five years and age 59-1/2.