72(t) SEPP Planning for the Self-Employed
Business owners and self-employed individuals often accumulate substantial retirement savings in accounts like SEP-IRAs, SIMPLE IRAs, and Solo 401(k)s. When these individuals need to access their funds before age 59½, IRS Rule 72(t) provides the same penalty-free distribution option available to employees with traditional IRAs and 401(k)s.
However, there are some unique considerations for business owners that make working with a specialized 72t advisor especially important.
Which Retirement Accounts Are Eligible?
The following retirement accounts commonly used by self-employed individuals and business owners are eligible for 72(t) SEPP plans:
- SEP-IRA (Simplified Employee Pension) — fully eligible for 72(t) plans
- SIMPLE IRA (Savings Incentive Match Plan for Employees) — eligible, but with a two-year rule (see below)
- Solo 401(k) / Individual 401(k) — eligible, but may require separation from service or plan termination
- Traditional IRA — fully eligible, including rollover IRAs funded from business retirement plans
The SIMPLE IRA Two-Year Rule
SIMPLE IRAs have a special rule: you cannot roll over or distribute funds from a SIMPLE IRA within the first two years of participation without incurring a 25% penalty (instead of the usual 10%). After the two-year period, the standard 72(t) rules apply.
If you have a SIMPLE IRA that is less than two years old, you will need to wait until the two-year period has passed before establishing a 72(t) SEPP plan. A qualified 72t planner near you can help you time your plan correctly.
Solo 401(k) Considerations
Solo 401(k) plans — popular among self-employed individuals with no employees — are subject to the same 72(t) rules as employer-sponsored 401(k) plans. In practice, this often means rolling the Solo 401(k) into a traditional IRA before establishing the 72(t) plan, since Solo 401(k) plan documents may not support SEPP distributions.
Additionally, if you are still self-employed and contributing to your Solo 401(k), you may need to stop contributions before establishing a 72(t) plan to avoid modifying the account during the plan period.
People Also Ask: Business Owner 72(t) Questions
Can I establish a 72(t) plan while still running my business?
Yes, if you are using an IRA (including a SEP-IRA or rollover IRA). You do not need to close or sell your business to access your retirement funds through a 72(t) plan. However, if you are using a Solo 401(k), you may need to stop making contributions to avoid modifying the account during the plan period.
Can I continue contributing to my retirement accounts while taking 72(t) distributions?
You can continue contributing to a different retirement account (e.g., a new IRA or a different 401(k)) while taking 72(t) distributions from a separate account. However, you cannot make contributions to the same account that is subject to the 72(t) plan, as this would constitute a plan modification.
What if I sell my business and receive a large lump sum?
If you sell your business and receive a large lump sum, you may want to roll some or all of the proceeds into a retirement account and then establish a 72(t) plan to generate ongoing income. A qualified SEPP advisor can help you structure this transition to minimize taxes and maximize your long-term financial security.
Planning Ahead: Structuring Your Business Retirement Accounts for Future 72(t) Use
If you anticipate needing early access to your retirement funds in the future, it is worth structuring your business retirement accounts with that goal in mind. For example, keeping a portion of your retirement savings in a traditional IRA (rather than a Solo 401(k)) can make it easier to establish a 72(t) plan when the time comes.
At Spivak Financial Group, we work with business owners and self-employed individuals nationwide to plan for early retirement income. Schedule your free consultation today at (844) 558-5997.