72(t) Articles

Rule 72(t) SEPP-Top 10 Things To Do Now

72(t) SEPP (Substantially Equal Periodic Payments) is a financial planning strategy by which you can take penalty-free withdrawals from your IRA or old 401(k) before the age of 59½. However, there are several rules and considerations to keep in mind when setting up a 72(t) SEPP. Here are the Top 10 things you should do when considering a 72(t) SEPP:

1. Consult with a Financial Advisor: Before setting up a 72(t) SEPP, it is important to consult with a financial advisor who can help you determine if this is the right strategy for your financial situation.

2. Understand the Rules: The IRS has specific rules governing 72(t) SEPPs, and it is important to understand these rules before setting up a plan.

3. Choose the right calculation: There are (3) IRS approved methods for calculating your income under a 72(t) SEPP plan: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, and the Fixed Annuitization method. Your financial advisor can help you figure out what is best for you and your situation.

4. Calculate your payments/the income you will receive penalty-free: Once you have your annual income goal, you will need to calculate your payments. Do you want this income paid to you once per year, twice per year, quarterly or monthly? Your financial advisor can help you with the pros and cons of each and should be able to certify and verify the correct calculation so you don’t get in trouble with the IRS.

5. Consider the long-term impact: 72(t) SEPPs require you to take withdrawals for at least five years or until you turn age 59½, whichever is longer. You should consider the long-term impact of these withdrawals on your retirement savings.

6. Plan for unexpected expenses: 72(t) SEPPs do not allow for additional withdrawals in addition to the scheduled payments. You should plan for unexpected expenses to avoid having to take early withdrawals and incur penalties. Make sure you have a 2nd IRA or other non-IRA money available in the case of an unexpected expense or emergency financial situation.

7. Consider the impact on taxes: 72(t) SEPPs are subject to income tax, so you should consider the impact on your taxes before setting up a plan.

8. Review your plan annually: You should review your 72(t) SEPP plan at least annually to ensure that it is working correctly, that the Custodian is properly coding the distributions to you each year, and that your investment objectives are in line with your risk tolerance, time horizon and unique goals and objectives.

9. Be aware of penalties for breaking the plan: If you break a 72(t) SEPP plan, you will be subject to penalties and back taxes going back to the beginning. Be sure to understand the consequences of breaking the plan before setting it up.

10. Consider alternatives: There may be alternative strategies for accessing your retirement savings penalty-free, such as a Roth conversion or a loan from your 401(k). Your financial advisor can help you explore these options and other potential options and strategies.

A quick phone call will help you determine if this is right for you