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72(t) Articles

Rule 72(t) SEPP – Top 10 Things To NOT Do

Here are the Top 10 things you should NOT do when considering a 72(t) SEPP:

1. Do not set up a 72(t) SEPP without consulting with a financial advisor: It is important to seek professional advice before setting up a 72(t) SEPP to ensure that it is the right strategy for your financial situation.

2. Do not withdraw more than the calculated payments: If you withdraw more than the calculated payments from a 72(t) SEPP, you will be subject to penalties and back taxes. This is called breaking or busting the 72(t) SEPP.

3. Do not change the payment schedule: Once you have set up a 72(t) SEPP, you must adhere to the payment schedule. Changing the payment schedule will result in penalties and back taxes. This is also a potential problem that can cause breaking the 72(t) SEPP.

4. Do not forget to take into consideration all retirement accounts: If you have multiple retirement accounts, make sure to consider all of them when calculating your payments for the designated 72(t) SEPP.

5. Do not set up a 72(t) SEPP if you may need more money in the near future than the IRS Rule 72(t) SEPP will allow: 72(t) SEPPs require you to take withdrawals/income for a minimum of five (5) years or until you turn age 59½, whichever is longer. If you may need excess money in the near future above the amount that is allowed under IRS Rule 72(t) SEPP, then a 72(t) SEPP may not be the right income strategy for you. Learn what other options may be available.

6. Do not underestimate the impact on taxes: 72(t) SEPPs are subject to income tax, and the income payments to you may increase your tax bill. Make sure to consider the impact on your taxes before setting up a plan.

7. Do not forget to review your plan annually: It is important to review your 72(t) SEPP plan annually to ensure that it is in compliance with the rules and that your Custodian is properly coding these distributions each year with the proper code on the IRS tax form which will alert the IRS that these distributions are in fact early withdrawals (pre age 59 ½) and NOT subject to the early withdrawal penalty.

8. Do not set up a 72(t) SEPP without considering the long-term impact: 72(t) SEPPs may have a significant impact on your retirement savings over the long term. Be sure to consider the long-term impact before setting up a plan.

9. Do not assume a 72(t) SEPP is the only option: There may be alternative strategies for accessing your retirement savings penalty-free, such as a Roth withdrawal, cash value from a permanent  life insurance policy  or a loan from your 401(k). Consider all of your options before setting up a 72(t) SEPP.

10. Do not break the plan: Breaking a 72(t) SEPP will result in penalties and back taxes……back to inception of the SEPP. Make sure to understand the consequences of breaking the plan before setting it up.

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