72 t distributions
Sometimes you can take penalty-free early withdrawals from retirement accounts.
Provided by Richard W. Greene, CLU, ChFC
Do you need to access your retirement money early? Usually, anyone who takes money out of
an IRA or a retirement plan prior to age 59½ faces a 10% early withdrawal penalty on the
distribution. That isn’t always the case, however. You may be able to avoid the requisite penalty
by taking distributions compliant with Internal Revenue Code Section 72(t)(2).1
While any money you take out of the plan will amount to taxable income, you can position
yourself to avoid that extra 10% tax hit by breaking that early IRA or retirement plan
distribution down into a series of substantially equal periodic payments (SEPPs). These periodic
withdrawals must occur at least once a year, and they must continue for at least 5 years or until
you turn 59½ (whichever occurs later).1,2
How do you figure out the SEPPs? They must be calculated before you can take them. Some
people assume they can just divide the balance of their IRA or 401(k) by five and withdraw that
amount per year – that is a mistake, and that can get you into trouble with the IRS.2
The IRS allows you to calculate SEPPs by three methods, all with respect to your age and your
retirement account balance. When the math is complete, you can schedule SEPPs in the way
that makes the most sense for you.
The Required Minimum Distribution (RMD) method calculates the SEPP amount by dividing your
IRA or retirement plan balance at the end of the previous year by the life expectancy factor
from the IRS Single Life Expectancy Table, the Joint Life and Last Survivor Expectancy Table, or
the Uniform Lifetime Table.2
The Fixed Amortization method sets an amortization schedule based on the current balance of
your retirement account, in consideration of how old you are in the current year and your life
expectancy according to one of the above three tables.2
A variation on this, the Fixed Annuitization method, calculates SEPPs using your current age and
Appendix B of Rev. Ruling 2002-62. If you use the Fixed Amortization or Fixed Annuitization
method, you must also specify an acceptable interest rate for the withdrawals which can’t
exceed more than 120% of the federal mid-term rate announced periodically by the IRS.2
The financial professional you know can help you figure all this out, and online calculators also
come in handy (Bankrate.com has a very good one).
Problems occur when people don’t follow the 72(t) rules. There are some common snafus that
can wreck a 72(t) distribution, and you should be aware of them if you want to schedule SEPPs.
First of all, consider that this is a multi-year commitment. Once you start taking SEPPs, you are
locked into them. You will take them at least annually, and you won’t be able to contribute to
that retirement account anymore as the IRS doesn’t let you do that within the SEPP period.2
If you are taking SEPPs from a qualified workplace retirement plan instead of an IRA, you must
separate from service (that is, quit working for that employer) before you take them. If you are
51 when you quit and start taking SEPPs from your retirement plan, and you change your mind
at 53 and decide you want to keep working, you still have this retirement account that you are
obligated to draw down through age 56 – not a good scenario.1
Some people forget to take their SEPPs according to schedule or withdraw more than they
should, and that can subject them to Internal Revenue Code Section 72(t)(4), which tacks a 10%
penalty plus interest on all SEPPs already made. The IRS does permit you to make a one-time
change to your distribution method without penalty: if you start with the Fixed Amortization or
Fixed Annuitization method, you can opt to switch to the RMD method.3,4
How can I boost or reduce the SEPP amount? The easiest way to do that is to increase or
decrease the balance in the IRA or retirement plan account. You have to do that before
arranging the payments, however.2
If you need to take a 72(t) distribution, ask for help. A financial professional can help you plan
to do it right.
Richard w. Greene, CLU, ChFC may be reached at 520-745-5585 or email@example.com.
Visit our website at www.rwgreeneinc.com.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This
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1 - irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments#2 [11/21/13]
2 - forbes.com/sites/advisor/2012/02/13/the-72t-early-distribution-from-your-ira/ [2/13/14]
3 - financialducksinarow.com/531/penalties-for-changing-sosepp/ [3/27/09]
4 - bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx [4/3/14]
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