Rule 72(t) question in the current environment (stagflation?)

[FIRE 20/20]

In short - I have been retired since 2019 (age 42 at the time), and have been using the Roth conversion ladder to provide income.  For a variety of reasons (see below if you care) I may need to switch to 72(t) withdrawals.  My question is this:  If we enter a major recession or depression, and/or experience stagflation, will that cause any particular issues with 72(t) withdrawals?  I am 48 now, so I'll be locked in (other than the one allowed change to distribution type) for the next 11 years. 


More details on my situation follow, but I think the above captures most of what's needed to help answer the question.

I planned on using the Roth IRA ladder when I FIREd 6 years ago.  Everything is going fine, although some of my fixed costs (home insurance, utilities, property taxes) have gone up much faster than inflation, so my ladder rungs are a little small.  That's a solvable problem - more an annoyance than anything else.  The bigger problem is this - I plan to move to Portugal this summer, and while Portuguese law isn't 100% clear, most people interpret current law as saying that they DO tax Roth IRA withdrawals.  Obviously that's not good, particularly because my ladder rungs are a little smaller than I'd like and Portuguese taxes are much higher (close to double my rates in the U.S.).  I've basically decided that while I have a few options, using rule 72(t) is likely to be my best route to having income to live on in Portugal.  I have a decent understanding of the basics for 72(t), but only the basics.  I'm concerned that my lack of knowledge might bite me, and once you use 72(t) I'll be locked in until I'm 59 1/2 - and that's about 11 years. 

Is there anything I should know, beyond the basics, especially if I'm concerned about a possible high inflation, low return environment that seems possible given the current administration's economic policies?  Is there anything I should think about if I'm concerned that the administration's policies may result in a weaker dollar, resulting in lower purchasing power after I transfer my income from dollars to Euros? 

Any input would be greatly appreciated!

(By the way, I will be trying to find a financial advisor / planner / tax accountant.  The complexities of international taxation are above my knowledge level, so I will be getting professional help.  I just want to have a good understanding before I hire someone.)

[secondcor521]

I can't speak to Portuguese taxation or exchange rates, and I'll leave the political prognostications to others.

On the Roth conversion ladder, some thoughts:

1.  You'll be locked in to doing a 72(t) until 59.5, and you understand that.  This is mitigated a bit by the fact that you can always switch to the RMD method, which will avoid busting the SEPP but might result in significantly lower withdrawals.

2.  There is no penalty from the IRS if your traditional IRA goes to zero and you therefore can't continue the SEPP.  You'll be out of money, sure, but there's no additional penalty.

3.  So the big risk is probably the obvious one - if your IRA investments don't grow enough to enable you to maintain your SEPP withdrawals, and you have to switch to RMD method and you're running out of money.  But that's not really an SEPP risk per se, it's just regular old investment risk.  I guess if your SEPP withdrawals are particularly high as a percentage of your IRA balance, then it does also introduce some SORR risk, especially if you're spending all of your SEPP withdrawals as it sounds like you might be.

The obvious ways to mitigate these risks are (A) to invest in your IRA as you see fit based on your analysis of the world, and (B) try to minimize your SEPP as a percentage of your IRA balance while still withdrawing enough for your expenses.

You could only draw on your SEPP to the extent needed (like 25% or 50% of expenses) and get the rest of your income from other sources like a job, Roth withdrawals, pension, SS, whatever.

You could also split your IRA in two, start SEPP1 on IRA1 now, then hold IRA2 in reserve for a possible SEPP2 later.  I don't think anyone does this because it's unwieldy, but it's a thought.

Aside:  Make sure you understand that the interest rates used are not percentages of the balance.  The interest rate used goes into a formula which then spits out a withdrawal amount, which can be expressed as a percentage.  If you use the maximum interest rate allowed of 5%, and the most generous of the three approved methods (amortization), you can get to an almost 6% WR.

[FIRE 20/20]

Thanks for the reply.  Everything you said aligns with what I've read, so I'm glad that I don't seem to have any drastic misunderstandings.  I already do have a few different IRAs and 401(k)s, and I think it's likely that I will just do SEPP for one of them. 

I'm not too concerned about running out of money (barring a catastrophic global financial collapse).  My spending has been a lot lower than I planned before I FIREd, the markets have done well since 2019, and I did work OMY (actually 9 months).   My withdrawal rate has been in the 1.9-2.7% range each year that I tracked it.  I didn't intend for it to be so low - I just overestimated what I would spend after I FIREd.  The FIREd life is great without blowing money on entertainment!

Thanks again!