Author Topic: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?  (Read 5786 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 A–1 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 A–1 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.

UnleashHell

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #8 on: February 02, 2022, 08:05:26 AM »
couple of questions on the 72t (especially for  @secondcor521 as you seem to have nominated yourself as the expert!! all other input welcome though)

The calculation for the 72t - who does that? me? or the firm that hold the ira?
who notifies the IRS that its a sepp 72t withdraw?

cheers. I may have more!!

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #9 on: February 02, 2022, 08:31:25 AM »
couple of questions on the 72t (especially for  @secondcor521 as you seem to have nominated yourself as the expert!! all other input welcome though)

The calculation for the 72t - who does that? me? or the firm that hold the ira?
who notifies the IRS that its a sepp 72t withdraw?

cheers. I may have more!!

You do the calculations.  You can ask the IRA custodian to double check, but I doubt they would want the responsibility.

The IRS can infer that the withdrawal is a 72(t) when the receive a 1099-R with distribution code 1, and the taxpayer files an associated tax return reflecting the 1099-R and claims the exception by using exception code "02" on Form 5329 attached to their tax return to exempt themselves from the 10% early withdrawal penalty.

If the IRS audits a taxpayer doing a 72(t), then the taxpayer might have to show that the pattern of withdrawals meets an IRS-approved SEPP method and, if applicable, is using an acceptable interest rate, so anyone doing a 72(t) would be wise to retain records to show these things.

UnleashHell

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #10 on: February 02, 2022, 08:37:52 AM »
awesome. thanks.

Huffduf41

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #11 on: February 04, 2022, 04:24:36 AM »
Is TurboTax fluent in 72t?

secondcor521

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #12 on: February 04, 2022, 06:16:37 AM »
Is TurboTax fluent in 72t?

It'll definitely handle the distribution.  If it supports Form 5329, which it probably does, then it can also probably handle the exception code 02 stuff to excuse the 10% penalty.  I'd be surprised if there were an interview question somewhere asking if you are doing SEPPs / 72(t), but maybe.

yachi

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #13 on: February 08, 2022, 11:29:34 AM »
I'm not sure if this is being discussed, but I came across on Reddit that the IRS is getting ready to publish a change to the interest rate that can be used for the 72(t) calculation.  They're allowing you to use any interest up to 5%, or 120% of the fed rate (whichever is higher is the limit).

Quote
(c) Interest rates. The interest rate that may be used to apply the fixed
amortization method or the fixed annuitization method is any interest rate that is not
more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate (determined in
accordance with section 1274(d) for either of the two months immediately preceding the
month in which the distribution begins).

Here is the notice
https://www.irs.gov/pub/irs-drop/n-22-06.pdf

This should make 92(t) much more attractive as a withdrawal strategy.

moustachebar

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #14 on: February 09, 2022, 09:46:41 AM »
I'm not sure if this is being discussed, but I came across on Reddit that the IRS is getting ready to publish a change to the interest rate that can be used for the 72(t) calculation.  They're allowing you to use any interest up to 5%, or 120% of the fed rate (whichever is higher is the limit).

Quote
(c) Interest rates. The interest rate that may be used to apply the fixed
amortization method or the fixed annuitization method is any interest rate that is not
more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate (determined in
accordance with section 1274(d) for either of the two months immediately preceding the
month in which the distribution begins).

Here is the notice
https://www.irs.gov/pub/irs-drop/n-22-06.pdf

This should make 92(t) much more attractive as a withdrawal strategy.

After you mentioned this, I saw it on the calculator on 72t.net as well. 5% makes a huge difference, seems to me... Assuming you can choose the size of the initial TIRA, and since you can't do a Roth conversion from it once you start the 72(t) SEPPs, you can now partition a much smaller initial TIRA for the 72(t) SEPP payments than before. Giving you a higher payout for a lower initial amount and leaving you more flexibility for Roth conversion in the future.

I ran the numbers on the calcxml calculator because it's the only one I found that seems to let me tweak the assumed investment return. It has a bunch of annoying pop ups though.

I think this ruling makes a case for someone with a sizable TIRA to do the max annual withdrawal on the minimum amount up to the standard deduction (money now is better than money in five years via Roth ladder, assuming you will spend it or put it in low tax funds like VTSAX. Or, money now PLUS Roth ladder is OK too). Then since you still have a sizable TIRA separate, convert as much of that to Roth as needed/ desired.

Caveat is since you are likely only doing one withdrawal per year for the 72(t) to avoid mistakes, if you need minimum monthly cash flows for a mortgage or ACA, those added to the SEPPs could bring you above ideal income for taxes or ACA premiums and CSRs.

Does this seem right?

Is there a safe way to break up SEPPs to provide monthly payments? Or for mortgage and ACA purposes, can transfers from mutual fund/ settlement accounts work?

SpareChange

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #15 on: February 09, 2022, 10:13:17 AM »
I'm not sure if this is being discussed, but I came across on Reddit that the IRS is getting ready to publish a change to the interest rate that can be used for the 72(t) calculation.  They're allowing you to use any interest up to 5%, or 120% of the fed rate (whichever is higher is the limit).

Quote
(c) Interest rates. The interest rate that may be used to apply the fixed
amortization method or the fixed annuitization method is any interest rate that is not
more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate (determined in
accordance with section 1274(d) for either of the two months immediately preceding the
month in which the distribution begins).

Here is the notice
https://www.irs.gov/pub/irs-drop/n-22-06.pdf

This should make 92(t) much more attractive as a withdrawal strategy.

Thank you for posting this! Had not heard. This would be a very large change. Hmmmm.

MustacheAndaHalf

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #16 on: February 10, 2022, 11:33:59 PM »
Since I wasn't sure of my source for 72(t) information, I searched online and found Ed Slott, who is considered an IRA expert.  I've also heard his presentations years ago and probably read one of his books.

The two points he emphasizes: this is a long term decision you cannot alter.  Over the years, it's easy to make one mistake - and then every single withdrawal you've ever made incurs a 10% penalty.
https://www.irahelp.com/slottreport/3-reasons-why-you-may-want-think-twice-about-72t-payment-plan

markbike528CBX

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #17 on: February 11, 2022, 04:09:48 AM »
Since I wasn't sure of my source for 72(t) information, I searched online and found Ed Slott, who is considered an IRA expert.  I've also heard his presentations years ago and probably read one of his books.

The two points he emphasizes: this is a long term decision you cannot alter.  Over the years, it's easy to make one mistake - and then every single withdrawal you've ever made incurs a 10% penalty.
https://www.irahelp.com/slottreport/3-reasons-why-you-may-want-think-twice-about-72t-payment-plan.

Soooo.... you'll need Mr. Stlott's help, at a small fee maybe? :-)

moustachebar

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #18 on: February 13, 2022, 10:11:31 AM »
Soooo.... you'll need Mr. Stlott's help, at a small fee maybe? :-)

Or his network of vetted CPAs...

To be fair, I read his most recent book and it is full of scenarios where he urges extreme caution. Some of these are places where a professional could help. Others seemed less so. The sense I got was that he was writing for an audience that is less financially literate or used to less complexity.

Some blog I was reading, the author went for it with SEPPs. Tried 3 online calcs and got the same number, and decided the probability of error was low. If you keep the same number you do this once (If RMD method you do it each year).

I get that the penalty is high but I too would like to use this option at some point and am being put off it by fear.

katsiki

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #19 on: February 13, 2022, 09:27:09 PM »
This guy does it.  His posts are usually very good.  Hope it is helpful!

https://www.millionaireeducator.com/2017/01/faq-2-what-do-you-live-on.html

moustachebar

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #20 on: February 14, 2022, 06:19:57 AM »
This guy does it.  His posts are usually very good.  Hope it is helpful!

https://www.millionaireeducator.com/2017/01/faq-2-what-do-you-live-on.html

Thank you. From the comment responses it seems like he might not do it again if he had to do it over. Seems like he works enough that still he earns money and puts it into IRAs even as he's taking out of IRAs.

Not a catastrophe though. And if having the SEPPs set up helped them transition to their (mostly) post-work life, then it was probably worth it. It sounds like that may be the case.

The crazy thing is how the penalties are so severe for something called "substantially equal"... It really sounds like if you're close, you're all set, but no...

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #21 on: February 14, 2022, 10:28:21 AM »
The crazy thing is how the penalties are so severe for something called "substantially equal"... It really sounds like if you're close, you're all set, but no...

The withdrawals need to be substantially equal, periodic, and lasting until 59½ to qualify for the special exemption to the 10% early withdrawal tax. Either they meet these criteria or they don't. If they don't the 10% tax is due. Simple as that.

As someone who did the FIRE thing for a bit over two years and recently chose to start working again, I sure enjoy not being required to pull a bunch of money out of my IRA this year.

moustachebar

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #22 on: February 14, 2022, 12:07:08 PM »
I get it. Just that 'substantially' equal makes it sound like you're ok within some margin of error.

As someone who did the FIRE thing for a bit over two years and recently chose to start working again, I sure enjoy not being required to pull a bunch of money out of my IRA this year.

That's the main drawback as far as I can tell. The teacher linked above began working again and took a job with the ability to stash earnings in 401k. But not all jobs do... Nor do rental properties...

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Re: Anybody actually taking section 72(t) "SEPP" withdrawals from tIRA?
« Reply #23 on: February 18, 2022, 11:58:13 AM »
The change in rules to allow up to 5% seems significant. and applicable for anyone starting a sepp 72 (t) now.
I'll have to read it again because it changes a lot of things.