72t SEPPs to bridge the gap

[Yoheadden]

DW and I are planning on being in the class of 2024 at the age of 54. After all of the retirement calculators, reading and planning, we felt we were in good shape, but just wanted a second opinion. Sure, you can always go back to work (if you want to), but this is one of the biggest decisions of our lives and we want to get it right. Our accountant recommended a fee only FP to look over our situation, who after meeting with, we hired and yes, he agrees we are in good shape.

One of the key components of his plan for us, to at least bridge the gap, between ER and turning 59 1/2 is the use of 2 72tSEPPs. One for each of us. DW and I have very similar account balances in Roth, Simple and Sep accounts. I believe the idea of using 2, instead of just one of ours is to not run down just 1 account with bigger withdrawals and spread the risk, should something happen with the withdrawals of not being taxed on just 1 account.

I’m curious, is anyone using 72tSEPPs to help them to get to 591/2?
Which method did you choice and why ?
Do you take your payments monthly, quarterly or as 1 annual lump sum ?

 

[qwerty3656]

FWIW, here is a discussion I saw on Reddit recently. Apparently you can use a much larger interest rate than you used to (and so take a larger withdrawal).

https://www.reddit.com/r/financiali...ay_be_superior_to_the_roth_conversion_ladder/

 

[Fermion]

I'll follow because we may need to dig into our 401K before 59 1/2 also. The 401K has grown a lot while our taxable has been hit pretty hard with the costs of building an entire house ourselves (hint, sweat equity is really just sweat, increased materials costs eat up the equity part).

The other way to go I guess would be to cash out the house with some sort of reverse mortgage, but being age 51, that seems a little early.

 

[38Chevy454]

The other way to go I guess would be to cash out the house with some sort of reverse mortgage, but being age 51, that seems a little early.

HELOC as another way to get some money out?

Back to the OP's question. I do not see anything wrong with the 72t, just beware that once you set it the amount is fixed until 59.5; you do not get the option to take out as needed. Substantially Equal Periodic Payments. From my understanding, it doesn't have to be monthly. You can do once/year or whatever frequency works, but it has to be the same amount each year. The amount for the 72t should be broken out into a separate account, so that you have that account for the 72t withdrawals, and then your remaining pretax account free to do what you want with.

If you end up with more moeny than you estimated, then the after tax cash can be invested into a regular brokerage type account. Or use the extra cash to pay for Roth conversion taxes.

Just a dumb question, is there any chance you might keep working until 55 and then you can do flexible rule of 55 withdrawals form your pretax accounts instead? I realize that is past your proposed age 54 retirement.

 

[HenryD]

Just a dumb question, is there any chance you might keep working until 55 and then you can do flexible rule of 55 withdrawals form your pretax accounts instead? I realize that is past your proposed age 54 retirement.

Rule of 55 is only available from a 401k with the last j*b you separate from. Doesn't work for IRAs, old 401ks, or as far as I can figure out, a solo 401k. Different downsides, and not necessarily better than 72T, IMHO.

 

[Morgan22]

I've been planning this for years, so I've read everything available about this subject that I can find.

I'm not sure I would use both of your IRA's for 72t w/d's. If one of yours is sufficient for the amount of funds you need, leave the other one as a backup.

DH and I will be starting 72t withdrawals starting in 2024 when we estimate his 457b that we are using to live off of will run out of funds. Since my rIRA is larger than his we'll just use mine. With the new rule where you can use 5% as your interest rate (you can still use 120% of fed midterm rate) I'll be able to split my rIRA into 2 separate accounts and use one for the 72t w/d. The 2nd account can be used as a backup if we decide we want or need to spend more. Then of course we also have my DH's rIRA as a backup also.

I'll be using the fixed amortization method since it produces the highest disbursement amount. My 72t will last for about 8 years. I've calculated the amount myself and compared against dinkytown.net 72t calculator and it matches. (Some online calculators have not updated their life expectancy tables yet, so for instance bankrate.com's calculator doesn't match my calc. But I can tell they are still using the old tables.) I have reported to bankrate, hopefully they update soon. We'll also be pulling once per year and dump into a MMF and automate monthly transfers to our checking account. (Just simplifying our lives since we travel alot).

Also, 72tnet.com is a good resource to look through. You should check your FP's math before implementing.

Another note, we also recently moved all of our retirement accounts to Fidelity. (I've read online that they deal the best with 72t's, plus I had an account there and was happiest with their website/service.) Again, just trying to simplify our lives.

 

[SnowballCamper]

I’m curious, is anyone using 72tSEPPs to help them to get to 591/2?
Which method did you choice and why ?
Do you take your payments monthly, quarterly or as 1 annual lump sum ?

Yes, I am but not DW. I did fixed amortization for simplicity. I take payments annually. I wrote about it here. https://www.early-retirement.org/forums/f28/decision-to-start-sepp-or-72-t-plan-111263.html

Do some research on any changes that came out recently... I'm not sure exactly what they all are.

 

[Yoheadden]

I'll follow because we may need to dig into our 401K before 59 1/2 also. The 401K has grown a lot while our taxable has been hit pretty hard with the costs of building an entire house ourselves (hint, sweat equity is really just sweat, increased materials costs eat up the equity part).

The other way to go I guess would be to cash out the house with some sort of reverse mortgage, but being age 51, that seems a little early.

Here is some information on the topic, but as mentioned above, check for any current changes.

https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments

https://www.abovethecanopy.us/the-ultimate-guide-to-early-retirement-with-72t-distributions/

 

[38Chevy454]

Rule of 55 is only available from a 401k with the last j*b you separate from. Doesn't work for IRAs, old 401ks, or as far as I can figure out, a solo 401k. Different downsides, and not necessarily better than 72T, IMHO.

That's why I said keep working to 55. If you do rule of 55 withdrawals, it is from 401k/403b accounts at that job. I might have been a bit more specific, but my intent for the question was as an alternate way to get cash out of pretax accounts. - at the cost of another year working.

 

[CyclingInvestor]

I retired at 48 in 2006 (programming) with 90% in 2 traditional IRAs (80%, 10%) and 10% in aftertax assets.

I took 72t withdrawals from the big IRA to live on from 2006-2018 using annual recalc method, using the aftertax assets to fill the gaps and then the smaller IRA as an emergency fund til reaching 59.5.

It all worked out well. A small excel spreadsheet calculated the exact amount to pull each year, which I did throuhout the year as needed.

 

[SoClose]

Congrats!

We retired at 47 and chose to do Roth conversions 5 year ladder to fund our ER. The 72t’s seemed too scary for us.

Yes, it requires saving cash preretirement for the first years

 

[FLSUnFIRE]

That is my plan after the first couple years depending on my balances and expected other income. I will use life expectancy method as that should lead to increasing amounts as my portfolio hopefully grows and, unfortunately, as my expected remaining life decreases. I'm in TSP so it is pretty easy to select the method and get a 1099 showing qualified withdrawal that takes away some of the nail-biting worrying about busting my SEPP.

 

[Yoheadden]

That's why I said keep working to 55. If you do rule of 55 withdrawals, it is from 401k/403b accounts at that job. I might have been a bit more specific, but my intent for the question was as an alternate way to get cash out of pretax accounts. - at the cost of another year working.

I looked into this because it would be easier to implement than a 72t SEPP, but unfortunately, neither a SEP or Simple can be used for the rule of 55.

https://www.irahelp.com/slottreport/5-things-you-must-know-about-age-55-rule

 

[Yoheadden]

I retired at 48 in 2006 (programming) with 90% in 2 traditional IRAs (80%, 10%) and 10% in aftertax assets.

I took 72t withdrawals from the big IRA to live on from 2006-2018 using annual recalc method, using the aftertax assets to fill the gaps and then the smaller IRA as an emergency fund til reaching 59.5.

It all worked out well. A small excel spreadsheet calculated the exact amount to pull each year, which I did throuhout the year as needed.

Congrats on being able to ER so early. I’m thinking of supplementing the 72t with either Roth or HSA deductions to manage the taxes. You definitely need to be organized with a 72t. A spreadsheet was a good idea.

 

[Yoheadden]

Congrats!

We retired at 47 and chose to do Roth conversions 5 year ladder to fund our ER. The 72t’s seemed too scary for us.

Yes, it requires saving cash preretirement for the first years

Congrats on the very early ER. 72ts can definitely be intimidating. I wish we had the extra aftertax money, but we tried to maximize pretax with what we could.
It’s a good lesson for people still saving. Try to balance out your savings.

 

[Fermion]

I have not really dug into the nitty gritty of 72t but it is definitely something I am considering for us.

Just to see if I sort of understand things, could we do this (married couple, would be age 53 (primary 401K account holder) and 52 spouse?

401K account balance: $1,700,000 from primary holder (age 53)

If we split off $400,000 from that 401K (would we roll it into a traditional IRA?) and then set up a 5% rate 72t on it, the calculator says that our maximum distribution would be $25,513 a year.

Is that all there is to it? We would pay regular income tax on the $25,513 (which for a married couple would be $0 a year if no other income).

Could we end this when the primary reaches 59.5 or do you have to keep taking the $25,513 until you die?

We could supplement the remaining income needed by taking a heloc or pulling from post tax Roth contributions from the past.

What are the downsides? I get that if a rich uncle that everyone but us seems to have leaves you $2 million that you would end up not wanting the $25k, but other than that?

 

[Morgan22]

If we split off $400,000 from that 401K (would we roll it into a traditional IRA?) and then set up a 5% rate 72t on it, the calculator says that our maximum distribution would be $25,513 a year.

Is that all there is to it? We would pay regular income tax on the $25,513 (which for a married couple would be $0 a year if no other income).

Could we end this when the primary reaches 59.5 or do you have to keep taking the $25,513 until you die?

What are the downsides? I get that if a rich uncle that everyone but us seems to have leaves you $2 million that you would end up not wanting the $25k, but other than that?

Yes, you should roll out the amount you want to use for your 72t plan to a rIRA.

I'm curious, how are you getting $25,513? If you are 53 in the year of starting distributions, and you use a 5% rate, I calculate $24,875.92. Dinkytown.net shows $24,876 (it rounds). This is for the Fixed Amortization Method which gives the largest distribution amount.

You only have to take distributions until age 59.5. Don't skip the final distribution or you can bust the plan and pay penalties.

That's pretty much all there is to it. But read through 72tnet.com also to get more comfortable with 72t.

Edited to add: I think I see how you are getting your number. You may be using the bankrate 72t calculator. They have not updated their life tables to the latest that came into effect at the beginning of this year.

 

[teej1985]

Rule of 55 is only available from a 401k with the last j*b you separate from. Doesn't work for IRAs, old 401ks, or as far as I can figure out, a solo 401k. Different downsides, and not necessarily better than 72T, IMHO.

Rollover your old 401ks and IRAs into the 401k at your current job. Problem solved.

 

[jazz4cash]

Rollover your old 401ks and IRAs into the 401k at your current job. Problem solved.

It appears there is no 401k to roll into.

Edit: reviewing OP’s comments, several references to SEP and SIMPLE IRAs but no comment about a 401k.

 

[FLSUnFIRE]

This is for the Fixed Amortization Method which gives the largest distribution amount.

It can start off the highest but if the SEPP period is long that payment could still seem very low with respect to inflation and potentially the assets in the account. Fortunately, one can switch to the RMD method (once and permanently) to access a greater payment after portfolio growth and lower life expectancy. Personally, I like the RMD from the start as it starts more conservative in the early years when SORR is greatest and if the market is friendly will automatically increase my payment.

 

[zinger1457]

There was a previous thread concerning 72t's and comments were made that there are IRS PLR's (Private Letter Rulings) that now allow the Fixed Amortization Method to be recalculated every year. I'd be careful going down that road but it might be an option to look into.
https://www.early-retirement.org/forums/f28/correct-execution-of-a-72t-plan-106890.html

 

[Morgan22]

It can start off the highest but if the SEPP period is long that payment could still seem very low with respect to inflation and potentially the assets in the account. Fortunately, one can switch to the RMD method (once and permanently) to access a greater payment after portfolio growth and lower life expectancy. Personally, I like the RMD from the start as it starts more conservative in the early years when SORR is greatest and if the market is friendly will automatically increase my payment.

Yes, this is true. Hopefully if using the Fixed Amort. Method the person has some extra savings on the side to supplement income when needed.

I guess the problem I see with using the RMD method is when you are trying to control your income for ACA premium credits.

 

[Morgan22]

There was a previous thread concerning 72t's and comments were made that there are IRS PLR's (Private Letter Rulings) that now allow the Fixed Amortization Method to be recalculated every year. I'd be careful going down that road but it might be an option to look into.
https://www.early-retirement.org/forums/f28/correct-execution-of-a-72t-plan-106890.html

I would be interested to hear if anyone has received a PLR and how expensive and time consuming the process is. So if anyone has, please chime in.

 

[DD4L]

Used to think I was in the 72t SEPP camp but no longer too sure it really works for my case.

My Traditional and Roth accounts consist of Dividend and Preferred stocks
and I only want to access their dividends, as opposed to killing the geese that are laying the golden eggs. The geese need to live forever. Also don't want to surrender full control of the accounts to the brokerage just in case a stock reduces/eliminates it's dividend or a Preferred get's called and I need to replace.

That aside, the idea of taking the 10% penalty used to disturb me but then Covid came along and i honestly believe life's too short to worry about it anymore, none of us know how long we have left on this floating rock after all.

Per Robbie - Blow that dough!!

It looks likely I'll just make dividend withdrawals and suck up the 10% penalty on an as-required basis (after rental property and regular brokerage payments are exhausted)

Was curious if anyone could see something obvious I'm missing? The official information doesn't seem to take into account my situation but it's fine.

DD4L

 

[levindb]

No one that I know could have predicted these last 5 years back in 2017. The 72t is a pretty firm contract that defines your income for the next 5 years or until 59.5.

Consider breaking your accounts into multiple smaller IRAs. Then set up the 72t on just 1 or 2 of those accounts. If you need more money before age 59.5, you can set up another 72t...sort of like creating a 72t ladder, but only if you need more $$ than you originally planned for. This flexibility may help you sleep better at night and allow you to commit a smaller amount in the initial 72t.