SEPP 72t updated, much better now.

[moof]

https://www.irs.gov/pub/irs-drop/n-22-06.pdf

TL;DR:  The acceptable minimum interest rate you can use in calculations now has a 5% floor, which allows a much higher penalty free withdrawal rate, like up to 6% percent or so depending on your particulars.

(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). The revenue rulings that include the section 1274(d) federal mid-term rates may be found at https://apps.irs.gov/app/picklist/list/federalRates.html.

[zolotiyeruki]

Whoa, that can have a serious impact on withdrawal strategies for people who have nearly all their savings in traditional IRAs and 401ks. Last time I looked into a SEPP,  the calculators would only allow 2-3% withdrawal. A 5% floor means you can use a 4% WR completely from tax-deferred accounts. You don't even have to do a Roth Pipeline

[Arbitrage]

Yes, it is interesting.  I've been counting on the Roth conversion ladder to get me through, but the change has had me considering a hybrid solution.  Once fully FIREd, I may split up our tax-deferred into a couple of IRAs, and use the 72(t) to give us a baseline income, say to cover all housing expenses or whatever.  That way, we can still set up Roth conversions elsewhere to control our MAGI and give us long-term flexibility that 72(t) lacks.  The 5+% withdrawals this change allows will make the strategy a lot more viable. 

[cool7hand]

Wow. Thanks for sharing!

[moof]

Yes, it is interesting.  I've been counting on the Roth conversion ladder to get me through, but the change has had me considering a hybrid solution.  Once fully FIREd, I may split up our tax-deferred into a couple of IRAs, and use the 72(t) to give us a baseline income, say to cover all housing expenses or whatever.  That way, we can still set up Roth conversions elsewhere to control our MAGI and give us long-term flexibility that 72(t) lacks.  The 5+% withdrawals this change allows will make the strategy a lot more viable.

Pretty much my thinking.  I can peal off about 2/3 my IRA balance to cover the baseline, and be more flexible with how I disperse the rest, using my relatively meager Roth principal and taxable balances for lumpier events for the next dozen years before age 59.5.  Sadly inflation adjustability is not in the IRS’s vocabulary still, so additional disbursements, or just taking the penalty on a small portion of spending if need be.  The old interest rate was going to force me into committing more than I wanted just to get the baseline spend covered.

[secondcor521]

The 5+% withdrawals this change allows will make the strategy a lot more viable.

Note that it's a 5% interest rate, not a 5% withdrawal rate.  The 5% interest rate goes into a formula for two of the supported IRS methods, and it spits out a withdrawal amount.  I'm not sure if the withdrawal amount that results is more than or less than 5% of the balance.

Also, on those two methods that use interest rates, I believe it's a one-and-done calculation, unlike the RMD method which is recalculated each year.  So the calculated withdrawal amount remains constant as the underlying IRA value fluctuates, which means (a) the effective %WR changes, and (b) if I'm right, then you don't get to recalculate each year if the IRA value goes up (although you are allowed a one-time one-way switch to the RMD method).

[terran]

Note that it's a 5% interest rate, not a 5% withdrawal rate.  The 5% interest rate goes into a formula for two of the supported IRS methods, and it spits out a withdrawal amount.  I'm not sure if the withdrawal amount that results is more than or less than 5% of the balance.

Playing around with https://www.bankrate.com/retirement/calculators/72-t-distribution-calculator/ with a 5% interest rate it looks like two of the methods result in a somewhat, but not very much, higher than 5% withdrawal rate depending on age.

[moof]

The 5+% withdrawals this change allows will make the strategy a lot more viable.

Note that it's a 5% interest rate, not a 5% withdrawal rate.  The 5% interest rate goes into a formula for two of the supported IRS methods, and it spits out a withdrawal amount.  I'm not sure if the withdrawal amount that results is more than or less than 5% of the balance.

Also, on those two methods that use interest rates, I believe it's a one-and-done calculation, unlike the RMD method which is recalculated each year.  So the calculated withdrawal amount remains constant as the underlying IRA value fluctuates, which means (a) the effective %WR changes, and (b) if I'm right, then you don't get to recalculate each year if the IRA value goes up (although you are allowed a one-time one-way switch to the RMD method).

I think you get the gist.  SEPP/72t is just one tool for getting 401k/IRA access before 59.5, and is indeed obnoxiously restrictive.  In my case I can split off a chunk off with a 5.7% initial withdrawal rate, which will be locked in for a dozen years.  I’ll need to use other accounts for lumpy expenses and fill the gap that inflation will open up.  A Roth ladder isn’t in the cards for me, and this looks like the better approach for me.

[Arbitrage]

The 5+% withdrawals this change allows will make the strategy a lot more viable.

Note that it's a 5% interest rate, not a 5% withdrawal rate.  The 5% interest rate goes into a formula for two of the supported IRS methods, and it spits out a withdrawal amount.  I'm not sure if the withdrawal amount that results is more than or less than 5% of the balance.

Also, on those two methods that use interest rates, I believe it's a one-and-done calculation, unlike the RMD method which is recalculated each year.  So the calculated withdrawal amount remains constant as the underlying IRA value fluctuates, which means (a) the effective %WR changes, and (b) if I'm right, then you don't get to recalculate each year if the IRA value goes up (although you are allowed a one-time one-way switch to the RMD method).

I'm aware.  That's why I said "5+%", not 5%.