Anyone using S.E.P.P. for FIRE income?

[hobbes1]

SEPP = Substantially Equal Periodic Payments, which allow one to withdraw at a fixed rate, from retirement account(s), with no penalty, prior to age 59.5 year old.

Curious if anyone is using this strategy, what you experience has been setting it up and if there are any caveats, pro's/con's, etc. that you'd care to share for someone contemplating this method of income in early retirement.

Currently, my wife and I have investments in 403b/Trad. IRA as well as Roth IRAs that are generating around $30k/yr. We are not ready to FIRE yet and are continuing ot max out all available investment options as well as HSA starting this coming year. We also have company funded pension for me and state retirement for her. IF I terminate employment, I could take a lump sum from the pension and roll it into T.IRA or leave it alone and draw a monthly as early as 55yo. My wife won't be able to touch hers until actual retirement age.

IF/When we retired (FIRE), we'd roll all available retirement accts (perhaps excluding my pension) into T IRAs and then SEPP the income out of them for living expenses. Perhaps subsidized by employment that pays poorly but that is more enjoyable :)

Thoughts?

Thanks in advance!

[RJCPA614]

I think the primary downside would be the lost flexibility since you would be locked into the SEPP schedule once started.  I believe the payments have to last at least five years or until after age 59.5, whichever is later.  You would generally have more flexibility in regards to when you recognize income using a Roth conversion strategy, assuming it is otherwise practical.

[moof]

The good news is that you don't have to SEPP everything.  You can set aside say 1/2 or 2/3 and SEPP that account, while doing a Roth ladder with the rest, or just taking the penalty for early withdrawals for anything you need above the SEPP amount.

In my planning SEPP looks like the best solution for my situation where over 2/3 of my money will be in 401k's and IRA's, with less than 1/3 total available in taxable and Roth principle.  It will be just fine if I zero the easy to access stuff out getting to 59.5 to fill in the gap that the conservative SEPP rules inflict, then I can get to the the rest penalty free.

[secondcor521]

I was planning on SEPP for a long time until I learned about the Roth conversion ladder.

Overall, the Roth conversion ladder is more flexible than the SEPP, but you can do several things with the SEPP to make it more flexible:

1.  You can split your T-IRA into multiple accounts and do a SEPP program on each one individually.  Each SEPP program can be a different type (there are three, I forget what they are).
2.  The law does allow you to do a one time change from one type to another if you want.
3.  You do get to pick your interest rate for the methods that those apply to (within reason).
4.  The law has softened in recent years on what happens if you run out of money in the account due to an SEPP.

One thing to note:  If you do make a non-SEPP withdrawal, you need to make it from a T-IRA that does not have an SEPP program attached to it.  If you make that non-SEPP withdrawal from a T-IRA that has an SEPP program attached to it, you will bust the SEPP and will owe back taxes and penalties.

[hobbes1]

These are good thoughts. Thanks for them.

I like the idea of having multiple T Ira accounts and that is actually how it had worked out so far....my wife and I each have one and when I roll out my 403b, I think I will put it into it's own separate T Ira account rather than roll it into my existing T Ira. Probably would do the same with my pension, if I choose to take a lump sum pay out. The pension allows an option (if I were to wait until 55 years old) of taking a larger monthly payout until 62 or 65 years old then nothing thereafter. I'd have to live until almost 80 yo if I took the normal monthly payout that lasted for my lifetime, to break even. Will cross that bridge when I get there.

[SachaFiscal]

I've been debating Roth Ladder vs. SEPP and saw this relevant blog post from Mad Fientist:

http://www.madfientist.com/how-to-access-retirement-funds-early/

There's a graph in there which shows how your total investment does when you access the funds via Roth Ladder, SEPP, just taking the penalty, or if you just invested in a taxable account instead of tax-deferred.  SEPP wins out Roth Ladder is next best.  But the interesting thing is that just taking the penalty is not too bad of an option either.

So lots of options to access that money before 59.5.

I'm planning on retiring at age 41 (sometime next year), but DH still wants to work for a while so we'll live off his income while our nest egg grows.  I'm guessing he'll get a little jealous and decide to retire too after a year or two.  At that point we have some taxable funds that we'll exhaust before accessing our tax-deferred accounts.  I think we'll probably start converting a bit to Roth the years we're living off the taxable accounts, but maybe just a portion equivalent to our standard deductions to avoid taxes.  Then when the taxable funds run out, if the Roth Ladder funds are not enough we can start SEPP for a small amount.  If we need more money some years for house repairs or special vacations we can just take the penalty.

[respond2u]

I'm planning on starting my first SEPP in a few months as most of my money is in a tIRA.

I'll set up 3 SEPPs by transferring amounts from my source tIRA to a specific tIRA for each SEPP. I plan to start each one about 3 months apart, and no later than when I turn 54.5 (so that I can finish the 5 year minimum by the time I hit the 59.5 requirement).

There's a lot of intricacies with setting up a SEPP. Have you looked through the info at www.72t.net, like https://72t.net/72t/Calculator/Distributions?

I didn't realize I was this close to retirement until last fall. It took me about 6 months from realization to reality (enough time for a contract to end and earn the final straw). Before then, it wasn't tax wise to do a Roth conversion, even if I had foreseen the use.

The downside of the Roth Conversion Ladder is that it counts as income but doesn't provide living expenses. That means that it reduces the ACA subsidy without any other immediate compensation. The effective tax rate for me is about 25%.

--
Of course, all this will change when the Republicans change both the tax code and the health care law. Of the current 3 Republican tax proposals, only one includes income to determine the subsidy (all 3 include age).

[Gunny]

I plan to start a SEPP in September, as I will be 54.5 yo and this will lock me into the inflexibility of the SEPP for the shortest period of time.  I have a Federal TSP (403b) and plan to use the withdrawal method based on life expectancy.  TSP will do the annual calculations for me each year.  This will give me the least amount that I need (preserving principle) and automatically qualifies as a SEPP for tax purposes without having to do a lot of calculations myself.  As mentioned above, make sure you read the 72(t).net site.  It has everything you want to know about SEPPs, but was afraid to ask.  You need to know all the particulars so that you don't mistakenly "bust" the plan and owe the IRS. 

[hobbes1]

Thanks, all, for the replies. Good info here.

[PathtoFIRE]

Posting mostly to follow, and I don't have the time to pour over the 72t.net site any time soon (but I need to !).

One question though, with regards to 72t you always hear about mistakes resulting in huge penalties. In actuality, have you all heard of real case examples of this? And if so, how does this even end up coming to light? It just always seemed that if you were chugging along thinking you were doing everything right, even if something small was out of place, how does that even get discovered? Chances of audit are extremely small at the income levels we are talking about, but maybe a 72t is considered a red flag.

[hobbes1]

Good question. I don't know the answer but would be interested to hear from anyone who does....

[Gunny]

I haven't heard of any actual cases of someone busting their SEPP.  Ask the question in the 72t.net forum and you may get an example. 

[aceyou]

Ed Mills at themillionaireeducator is the king of the SEPP IRA.  He and his wife used it to cover his living expenses for the past several years and continues to do so.  He is now about 50 years old.  He's super responsive too, so if you head to his site and message him, he'll almost certainly answer any question you have and give you honest feedback.

[hobbes1]

thanks!

[jim555]

How about some accounts for 72t and some for Roth conversions.  This way the 72t can pay the tax on the Roth conversions.  A self funding Roth ladder!

[respond2u]

"How about some accounts for 72t and some for Roth conversions.  This way the 72t can pay the tax on the Roth conversions.  A self funding Roth ladder!"

If you're getting an ACA subsidy (e.g, < 42K for a single person), you get taxed on the roth conversion:
 - loss in ACA subsidy, ~ 15% tax
 - tax on money converted to Roth (depends on income level)
 - tax on SEPP money withdrawn to cover tax on Roth (also depends on income).
Those 3 add up to about 25% marginal tax rate in my case.

Not a good deal. Of course, if you're not getting an ACA subsidy, then it might be worth a look, especially if you are married or can file Head of Household (while that still exists...)