Is 72(t) a Good Idea?
The concept of 72(t), also known as Substantially Equal Periodic Payments (SEPP), has been around for a few decades now and is becoming increasingly popular among those looking to access their retirement funds early without incurring the usual 10% penalty. But is it really a good idea? In this blog post, we’ll take a look at the pros and cons of using 72(t) to access your retirement funds early.
What Is 72(t)?
72(t) is an IRS rule that allows you to access your retirement funds early without incurring the usual 10% penalty. It works by allowing you to withdraw money from your retirement account in substantially equal periodic payments (SEPP) over a period of time. The payments must continue for at least five years or until you reach age 59 ½, whichever is longer.
Pros of Using 72(t)
One of the biggest advantages of using 72(t) is that it allows you to access your retirement funds early without incurring the usual 10% penalty. This can be especially beneficial if you need access to cash quickly or if you want to invest in something that requires more capital than what’s available in your traditional retirement accounts.
Another benefit of using 72(t) is that it can help you avoid penalties on your withdrawals. Since the payments are spread out over a period of time, they are taxed as ordinary income rather than as capital gains.
Finally, using 72(t) can help you manage your cash flow more effectively since the payments are spread out over time rather than taken all at once. This can make budgeting and planning for future expenses much easier.
Cons of Using 72(t)
While there are many advantages to using 72(t), there are also some potential drawbacks that should be considered before making this decision. One of the biggest drawbacks is that once you start taking SEPPs from your account, you must continue taking them for five years or until age 59 ½, whichever is longer. This means that if something unexpected happens and you need access to more cash than what’s available in your SEPPs, you may not be able to get it without incurring penalties or taxes.
Additionally, since SEPPs are taxed as ordinary income rather than capital gains, they may be subject to higher tax rates depending on how much money you withdraw each year and where you live. This could significantly reduce the amount of money available for other expenses or investments.
Finally, since SEPPs must continue for at least five years or until age 59 ½ (whichever is longer), you must understand this time commitment.
As with any financial decision, it’s important to weigh both the pros and cons before making a decision about whether or not 72(t) is right for you. While there are many advantages to using this strategy such as avoiding penalties and taxes on withdrawals and managing cash flow more effectively, there are also some potential drawbacks such as having limited access to additional funds and potentially higher tax rates on withdrawals depending on where you live and how much money you withdraw each year. Ultimately, only after carefully considering all factors should one make an informed decision about whether or not 72(t) is right for them.
The Spivak Financial Group (home of the 72(t) Professor) are experts in the early retirement options and setting up 72(t) SEPP. Schedule your complimentary consultation, and let’s talk through your questions.