SEPP payments are reported on a 1099-R by your trustee/custodian and taxed as income. SEPP payments can be advantageous in a few ways: (1) Receiving payments while in a lower income bracket may make sense if you’ll be facing higher income brackets in the future, particularly those associated with Required Minimum Distributions (RMDs) in retirement. (2) State-specific tax advantages: Certain states offer exclusions, credits, or provide other tax-advantaged treatment of retirement account distributions.(3) Exemption from FICA/Medicare taxes: SEPP payments are not subject to FICA/Medicare taxes, which are typically charged on earnings from self-employment.

We believe it is highly unlikely a SEPP would fully deplete your retirement funds, more likely a SEPP  simply slows the rate of growth in your deferred retirement account. For example if you had $500k in a 401K and started a SEPP to supplement your income at age 50. Assuming normal market returns, and an annual SEPP distribution of $30,000, in 10 years your deferred retirement account would have a balance of $823k. Note the 4-5% generally agreed on “safe withdrawal rate” is typically calculated over a 30 year period, which generally doesn’t apply to your SEPP withdrawls

Since the nature of a SEPPs locks in a payment for an extended period of time, (the longer of 5 years or until you reach 59 ½.) It's important to proactively use SEPP planning in order to mitigate risks this can create. To reduce your payment, you’re allowed a one time switch in methods to the RMD method which effectively can reduce your initially planned payment by up to 60%. It’s possible to increase SEPP distributions depending on how deferred accounts are utilized in the set-up

We’re not aware of any evidence that points to SEPPs flagging clients for audits.  That said modifications to payments once started could indeed lead to inquiries by the IRS, and potential problems for the unprepared. In cases where you are audited you will 100% be asked to support your SEPP payments..

This is one reason you may choose to use a CPA to ensure you have the appropriate documentation to satisfy an initial request by the IRS.  In short be prepared to support your payments with documentation, and sufficient documentation supports every input into your SEPP calculation. You should also have the tax forms to support all SEPP distributions.

This is a complex area involving the use of SEPPs to move funds from tax deferred accounts into tax exempt accounts.  One benefit of this strategy is the mitigation of RMDs in your retirement years. Using a SEPP to accomplish this gives you more flexibility in the use of your funds.