Starting SEPP Distributions Mid-Year

[emel1]

I plan to begin taking SEPP distributions from my 401k on Sept 1 this year.  The payments will be equal amounts taken monthly for 5 years as I will be 60 by Sept 1, 2028.  Since this year I will only have 4 months of distribution payments (Sept-Dec), the 1099-R form I receive for 2023 will not reflect a full year.  In 2024, my 1099-R will reflect a full year amount as will 2025, 2026 and 2027.  But 2028, would only reflect 8 months of distribution payments if I stop the distributions after August 2028.  Can you confirm this would not be subject to the 10% tax penalty and not be a red flag for the IRS?  And then what if starting Sept 1 of 2028, I choose to increase the amount of my monthly distribution, my 1099-R will reflect a higher amount of distributions for 2028.  Will IRS know that I satisfactorily maintained the "substantially equal periodic payments" that meets the minimum requirement of 5 years so I can avoid the 10% tax penalty?  And how does Turbo Tax handle this when I file my tax returns?

[JBedford · Accepted solution]

Thanks for your questions, @emel1 !

The scenario you describe seems to meet the IRS requirements that the SEPP distributions continue for five years or until you reach age 59 1/2, whichever comes later. What you do after the five years have expired should have no impact.

TurboTax does have prompts related to SEPP distributions. When asked, you would need to answer that, "Yes, I got regular payments from this retirement account". On a later screen, TurboTax will give a list of options under the heading, "These Situations May Lower Your Tax Bill". Choose "Equal Periodic Payments", and enter the amount of the SEPP distribution. 

Hope this helps, please let me know if this raises additional questions!

[emel1]

Thanks for the response...that is very helpful.  One follow-up question...so when I am prompted by Turbo Tax to enter the amount of the SEPP distribution, am I entering the monthly amount that I am receiving?  Or am I to enter the annual amount from the SEPP calculation?  Or the amount that I received during the particular tax year that would match what is being reported on that 1099-R?

[Joe Bedford EA]

The latter. 

[emel1]

Ok...thanks.  So, when I file my taxes for the tax year that I receive the final SEPP distribution in 2028, that final distribution would be in August.  So, what if I were to decide to lower or increase my monthly distribution starting in September of 2028?  The distributions from the 401k for September to December would be unrelated to the SEPP.  My 1099-R for tax year 2028 wouldn't separate out those amounts, would it?  So, in this case, when Turbo Tax asks for the amount of my SEPP distribution, will I need to manually calculate the amount paid from Jan to Aug and enter that amount?  Or do I still just enter the amount the matches the 1099-R?  Or do I have to tell my plan administer that I was stopping the SEPP distributions in August and then they will somehow report something that accounts for the stoppage and separates out the different distribution amounts on my 1099-R?

[Joe Bedford EA]

Your financial institution may or may not separate those distributions. If not, then you would simply manually enter the amount of the SEPP distribution into TurboTax when prompted, as mentioned previously.