Question 1

What is a 72(t) Substantially Equal Periodic Payment (SEPP) plan?

Accepted Answer

A 72(t) SEPP is a provision in the IRS tax code that allows for penalty-free withdrawals from IRAs and other qualified retirement plans before the age of 59½. It requires the owner to take a series of "substantially equal periodic payments" over a specific timeframe.

Question 2

Who is eligible to set up a 72(t) SEPP?

Accepted Answer

Any individual with a qualified retirement plan (like a 401(k), 403(b), or IRA) who is under the age of 59½ can be eligible. There is no minimum age, but the account owner must have separated from service to use a 401(k) or other employer-sponsored plan.

Question 3

How much money can I withdraw using a 72(t) plan?

Accepted Answer

The amount you can withdraw is calculated based on your life expectancy (or joint life expectancy with a beneficiary) and a reasonable interest rate. The IRS provides three approved methods for this calculation: the required minimum distribution (RMD) method, the fixed amortization method, and the fixed annuitization method.

Question 4

What are the different 72(t) calculation methods?

Accepted Answer

Required Minimum Distribution (RMD) Method: The payment is recalculated each year based on your account balance and life expectancy. This method often results in the lowest initial payment but can fluctuate annually. Fixed Amortization Method: This method provides a fixed annual payment for the entire duration of the plan. The payment is calculated once by amortizing your account balance over your life expectancy. Fixed Annuitization Method: Similar to the amortization method, this provides a fixed payment. It uses an annuity factor from the IRS to determine the annual distribution amount.

Question 5

Do I have to pay taxes on my 72(t) distributions?

Accepted Answer

Yes. While you avoid the 10% early withdrawal penalty, the distributions are still considered ordinary income and are subject to federal and state income taxes.

Question 6

How long do 72(t) payments last?

Accepted Answer

The payments must continue for at least five full years or until you reach age 59½, whichever period is longer. For example, if you start a plan at age 57, you must continue payments until you are 62 (five years). If you start at age 52, you must continue until you are 59½.

Question 7

Can I change my 72(t) payment amount?

Accepted Answer

Generally, no. Once a plan is established using the amortization or annuitization method, the payment amount cannot be modified without incurring significant penalties. The IRS allows a one-time switch from the amortization or annuitization method to the RMD method.

Question 8

What happens if I make a mistake or stop the payments early?

Accepted Answer

If you break the 72(t) SEPP rules, the consequences are severe. The IRS will retroactively impose the 10% early withdrawal penalty on all distributions made from day one of the plan, plus interest. This is why professional guidance is critical.

Question 9

Why do I need a specialized 72t Advisor?

Accepted Answer

The rules governing 72(t) plans are complex and unforgiving. A specialized advisor ensures your plan is calculated correctly, structured with a compliant custodian, and managed properly to avoid any risk of busting the plan and incurring penalties.

Question 10

What is a "72(t)-friendly" custodian?

Accepted Answer

A 72(t)-friendly custodian is a financial institution that understands the specific administrative and reporting requirements for 72(t) SEPPs. They can properly code the distributions (using code 2 on Form 1099-R) to indicate a penalty exception, which is crucial for correct tax reporting.

Question 11

Can I still contribute to my retirement accounts while taking 72(t) payments?

Accepted Answer

No. You cannot make any additions to the specific IRA or retirement account from which you are taking 72(t) distributions. Doing so would be considered a modification of the plan and would bust it.

Question 12

What happens to the rest of my retirement savings?

Accepted Answer

You do not need to use your entire retirement savings for a 72(t) plan. Many clients choose to move only a portion of their funds into a new, dedicated IRA to fund the SEPP. The remaining funds can stay in their original accounts and continue to be invested for long-term growth.

Question 13

How do I get started with a 72(t) SEPP?

Accepted Answer

The first step is to speak with a qualified 72t Advisor. We will assess your financial situation, help you understand your income needs, and determine if a 72(t) plan is the right strategy for you. We then guide you through the entire process of setting up and managing the plan.

Question 14

What are the fees for setting up a 72(t) plan?

Accepted Answer

We offer a complimentary initial consultation to discuss your needs. Our advisory fees are transparent and based on the assets under management within the 72(t) plan. We will provide a clear fee schedule before you make any commitment.

Question 15

Is a 72(t) plan right for me?

Accepted Answer

A 72(t) plan is an excellent tool for those who need to access retirement funds early for a specific purpose, such as early retirement or bridging an income gap. However, it is an irrevocable decision that requires careful consideration. A consultation with a specialist will help you weigh the pros and cons for your individual circumstances.

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