How to enter 72(t) SEPP distributions

If a client is taking substantially equal periodic payments (SEPP) from a tax-deferred account in order to avoid premature withdrawal penalties under section 72(t), here is a three-step process to ensure these cash flows are included in the plan correctly. (Our product team is working on some features that will make this process easier, but this is currently the best process.)

1. Estimate the net present value of the 72(t) SEPP plan
2. Reduce the IRA(s) by this amount
3. Enter a nominal cash flow under Cash Flows > Other Income

Estimating Net Present Value of the SEPP

First, estimate the net present value (NPV) of the planned 72(t) distributions. For example, if you expect $1000/month for 5 years, the portfolio average return is 5% real, and inflation is 3%, you'd have the following using Excel's time value of money formula. You could also use an NPV formula. (Note that 12 * 5 - 1 = 59 because the first $1000 will come out before any growth has been applied. This example uses a monthly rate (5% - 3%) / 12, but you could use an annual rate and annual payments as well.)

PV(2% / 12, 59, -1000) = $56,147

You can find the average portfolio return for your plan in the "View More" section of the Portfolio Balance card on the main dashboard.

You can find your inflation assumption in the Capital Mkt Assumptions section if you're using Traditional or Regime-Based Monte Carlo.

If you're using the historical analysis method, the inflation assumption is the spread between 30yr Treasuries and TIPS at the end of the most recent month. At the end of June 2023, this was 2.23%.
 

Entering the SEPP as a Cash Flow

Finally, enter the SEPP distributions ($1000/month here) as a cash flow in "Other Income" with "Ordinary Income" tax treatment and "Not adjusted for inflation" inflation treatment. Be sure to set the correct beginning and ending dates.