72 t distributions


 

 

 

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 dick@rwgreeneinc.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

 

information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee

 

of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is

 

advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and

 

may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell

 

any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any

 

particular investment.

 

 

 

Citations.

 

 

 

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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