Author Topic: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?  (Read 2438 times)

Financial.Velociraptor

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I'm curious if anyone has experience with this.  Is it hard to keep up with the math?  Is the withdrawal rate substantial enough to be worthwhile?  Did you get audited?

I don't need to tap the tIRA yet.  Just want an extra bit of wiggle room in case of a second Great Recession event.

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #1 on: November 27, 2019, 06:38:40 PM »
I haven't yet, but I may.

I was quite familiar with them a few years ago because I've been interested in FIRE since long before the Roth conversion ladder became well known as a method.

The math is easy, although people will say that it is hard.  For the minimum distribution method, you take your year end account balance and divide it by a number that you look up in an IRS table - you do this for each year.  For the other two methods (amortization and annuity), you plug in your account balance, age, and an interest rate into a web calculator and out pops a number - you do the calculation once and then just take that amount every year.

The amount you can withdraw depends on a couple of things.  First, your age - the older you are, the more you can take out on a percentage basis.  Second, the method you use - the minimum distribution amount typically starts out lower than the other two, but grows over time; the other two methods it's typically a larger amount but stays the same over the period of the SEPP.  Third, the interest rate.  Higher interest rates mean you can take out more; currently we're in a relatively low interest rate environment so relatively speaking the amount you can take out is low.

I will say that for me, using the amortization method and 120% of the mid-term AFR for November and my age of 50, I could pull 4% of the account balance this year.  So for my purposes, it's a viable method.  The thing I keep in mind is that it is required to continue for 5 years or until age 59.5, whichever is later, so I would only do a relatively small one, because I then lock myself into that minimum income for the next 10 years.

I haven't done it yet so I haven't been audited.  Personally I wouldn't worry about an audit as long as I had either done the calculations myself, had them done by someone I trust who is a CPA, or gotten the same answers from multiple reliable-seeming websites.  And, of course, if I used a standard version of one of the three IRS-approved methods.  (You can use other methods, but if you do the recommendation is to get a PLR.)

Currently I don't need to start one either, but I think I may start one in a few years that covers maybe 25% of my annual spending needs.  The tradeoff for me is the size of my tax torpedo versus preserving my taxable account longer.

HTH.

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #2 on: November 27, 2019, 06:39:59 PM »
Oh, another thing - I plan to split my tIRA into two pieces before starting the SEPP.  That way I can do the SEPP from one and continue to do Roth conversions from the other.  When I hit 59.5 and finish the SEPP, I'll recombine.

sailinlight

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #3 on: November 27, 2019, 06:57:51 PM »
Oh, another thing - I plan to split my tIRA into two pieces before starting the SEPP.  That way I can do the SEPP from one and continue to do Roth conversions from the other.  When I hit 59.5 and finish the SEPP, I'll recombine.
Can you actually do that? I thought that the IRS treated all tIRAs accounts as one. How do you do this "officially"?

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #4 on: November 27, 2019, 07:15:12 PM »
Oh, another thing - I plan to split my tIRA into two pieces before starting the SEPP.  That way I can do the SEPP from one and continue to do Roth conversions from the other.  When I hit 59.5 and finish the SEPP, I'll recombine.
Can you actually do that? I thought that the IRS treated all tIRAs accounts as one. How do you do this "officially"?

Yes you can.  The IRS does treat all tIRAs as one for certain things (the pro-rata rule on conversions, and RMDs, among other things), but not for SEPPs.

Officially, you just call up your custodian and say you want to split your t-IRA and how much to move over.

markbike528CBX

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #5 on: November 28, 2019, 12:19:01 AM »
PTF

I plan on doing SEPP/ 72(t) for 2020 and beyond.

Using the Amortization method and Single Life Table 1.401(a)(9)9 A1 and well below  (0.9%) the mid-term rate (2.04 per https://www.irs.gov/pub/irs-drop/rr-19-26.pdf)  to achieve about 24K (taxable deduction Married Filing Jointly).

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx  get the  same number I do.

Have I missed anything?

I had someone say that you have to use the year-end value of the tIRA to calculate, but I haven't seen that elsewhere.  Comments, sources?

RWTL

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #6 on: November 28, 2019, 05:48:18 AM »
Posting to follow.

I have this as an option in the future, but hope to live off 457 and regular investment accounts.

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #7 on: November 28, 2019, 10:10:12 AM »
PTF

I plan on doing SEPP/ 72(t) for 2020 and beyond.

Using the Amortization method and Single Life Table 1.401(a)(9)9 A1 and well below  (0.9%) the mid-term rate (2.04 per https://www.irs.gov/pub/irs-drop/rr-19-26.pdf)  to achieve about 24K (taxable deduction Married Filing Jointly).

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx  get the  same number I do.

Have I missed anything?

I had someone say that you have to use the year-end value of the tIRA to calculate, but I haven't seen that elsewhere.  Comments, sources?

If you're using that low of an interest rate, you could increase your flexibility by splitting your IRA into two parts:  One that is small enough to throw off the $24K you need using 120% of the mid-term AFR, and the balance into the rest.  This way you could do Roth conversions or withdrawals with the 10% penalty or even a second (or more) 72(t) from the second IRA if you wanted to.

I wrote above that you need to use the year end value of the tIRA.  I think that is the conservative method, because it follows the IRS method for regular 70.5 RMDs, which is what I think the relevant IRS Rev Proc says to do, but I'm not sure about that.