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Dividends from retirement account using 72t?
Old 10-07-2020, 05:04 PM   #1
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Dividends from retirement account using 72t?

Iím 46 and Iíve reached my number, although I continue to work part time. My hope is that when I finally pull the trigger (likely within the next one to two years) Iíll be able to live off dividends instead of withdrawing from non retirement funds. To do this I would need access to my retirement account dividends penalty free. The only way I can think of to do this would be to utilize 72t, but can I even do this for retirement dividends and at age 47/48? Is there a better way to access retirement account dividends?
My other concern with accessing these dividends is that it will significantly increase my income vs cashing out from non retirement accounts, thus pushing my MAGI above threshold to qualify for ACA. Anyone else experience that?
Thanks for any input/advice.
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Old 10-07-2020, 05:22 PM   #2
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72t is called SEPP Substantially Equal Periodic Payments. So no, you can't just take dividends out. What you can do is estimate the amount you need, slice off part of your pre tax money to separate account. Then use that to get the SEPP. Then dividends just go into the SEPP account as reinvested or cash. Your remaining NON-SEPP money can reinvest dividends as well. In the end, it is basically the same, except it's not. Just think about the amount you need and use the 72t calculator to determine how much to slice off. You can invest that how you want, whether high dividend income, or growth or whatever makes you happy. In the end this is a money is fungible issue.

By controlling the SEPP amount, you can keep within limits for ACA. So utilize after tax money supplemented by the right amount of SEPP money to keep things within qualifying limits and tax tables.
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Old 10-07-2020, 09:56 PM   #3
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I retired at 48 and lived mostly on 72t withdrawals until I turned 59.5 almost 3 years ago. A simple spreadsheet told me how much to withdraw each year based on end-of previous year balance. My dividends generally exceeded my withdrawals, so I kept buying more stock most years. I was never able to qualify for any ACA subsidies as a result (which is actually a good problem to have).
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Old 10-07-2020, 10:07 PM   #4
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You certainly can start a 72(t) program at age 47 or 48. You will have to continue the 72(t) program until age 59.5.

The IRS looks at your IRA as one big black box of dollars. From a tax point of view, what goes on inside that big black box is irrelevant - dividends, stock sales and purchases, interest income, capital gains, capital losses. When money comes out, it will be taxed as ordinary income at ordinary income tax rates.

When you do a 72(t), the amount you take out depends on the interest rate you choose and the methodology that you choose. That amount may be more or less or approximately the same as your dividends, but that is irrelevant. All the IRS cares is that you take out that amount - whether you do so by selling shares, or taking cash, or any other approach doesn't matter to them.

The threshold to qualify for ACA subsidies is having a MAGI of 400% of the FPL for your family size and location. For a single person living in the lower 48 next year, that number is $51,040.

Two suggestions to consider:

1. Do a smaller SEPP and take money from taxable accounts in a mix that hopefully funds you until 59.5 and gets you some ACA subsidies.

2. Consider a Roth conversion ladder and money from taxable accounts in some mix that funds you to 59.5 and gets you ACA subsidies.

Whether these work for you or not depend on your specific account balances, withdrawal needs, and preference for flexibility, and maybe some other things. I was considering doing a 72(t) but then ended up using the Roth ladder because with teenagers and college expenses I didn't want to be locked into a SEPP for 14 years.
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Old 10-08-2020, 04:56 AM   #5
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Quote:
Originally Posted by Scout View Post
Iím 46 and Iíve reached my number, although I continue to work part time. My hope is that when I finally pull the trigger (likely within the next one to two years) Iíll be able to live off dividends instead of withdrawing from non retirement funds. To do this I would need access to my retirement account dividends penalty free. The only way I can think of to do this would be to utilize 72t, but can I even do this for retirement dividends and at age 47/48? Is there a better way to access retirement account dividends?
My other concern with accessing these dividends is that it will significantly increase my income vs cashing out from non retirement accounts, thus pushing my MAGI above threshold to qualify for ACA. Anyone else experience that?
Thanks for any input/advice.
I think it is unwise to consider only dividends... you'll likely end up working longer than you need to. There is nothing wrong with using total return (dividends and share appreciation) ... you can even haircut share appreciation some to be conservative but it is foolish to ignore it entirely. The good news is that if you're only a couple years away from living only on dividends then it is likely that you are there now.

So for example, let's say that your portfolio dividend yield is 2.0%.... if you're close then let's say that 2.5% would cover your expenses. In the long run it is highly unlikely that share appreciation will be less than 0.5% so even if you retire now your ortfolio wil still be growing.

Also, just because you withdraw money from tax-deferred accountusing a 72t doesn't mean that you have to spend it... if withdrawals exceed you spending then just invest in taxable accounts in the same investments in your tax-deferred accounts and that taxable account money will give you more financial flexibility for unforseen expenses.

If you have taxable account money I would utilize that first before setting a 72t in place to see what happens with ACA subsidies. I wouldn't want to design a 72t program based on managing income to ACA subsidies and then have ACA subsidies go away... though I guess perhaps you could add another 72t as long as the two combined do not exceed the maximum... I'm not totally sure about that last part.
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Old 10-08-2020, 09:32 AM   #6
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Originally Posted by pb4uski View Post
Also, just because you withdraw money from tax-deferred accountusing a 72t doesn't mean that you have to spend it... if withdrawals exceed you spending then just invest in taxable accounts in the same investments in your tax-deferred accounts and that taxable account money will give you more financial flexibility for unforseen expenses.

If you have taxable account money I would utilize that first before setting a 72t in place to see what happens with ACA subsidies. I wouldn't want to design a 72t program based on managing income to ACA subsidies and then have ACA subsidies go away... though I guess perhaps you could add another 72t as long as the two combined do not exceed the maximum... I'm not totally sure about that last part.
Good point on the first paragraph above (and I agree with you about the total return part that I clipped).

It is possible to add a second 72(t) program, but you may only have one 72(t) program per IRA. So the way to do it is to split the IRA first into two IRAs, start the first 72(t) on the first one and hold the second IRA in reserve. If a second 72(t) is then desired, split the second IRA into two pieces creating a second and third IRA. Start the second 72(t) on the second IRA while continuing the first 72(t) on the first IRA, and keep the third IRA in reserve.

In fact, you can even use different methodologies and interest rates in your multiple 72(t) programs, so it turns out that you can get quite flexible and creative, more so than was intended by the law.
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Old 10-09-2020, 08:38 AM   #7
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Thanks for the very helpful replies. Thereís so much I donít know about 72t, but I have a year or two to learn. My ACA Will be 300 and change according to health Sherpa vs 1600 monthly I pay now so I hope to keep that income below 400fpl. After years of accumulation itís an entirely new intellectual challenge (even more so psychological) learning withdrawal strategies. Iím thankful to have you guys to help!
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Old 10-09-2020, 08:58 AM   #8
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I can't offer solutions, but I just wanted to say I appreciate this thread. I am 43 and plan to RE at 48. DW will be 53 at the time. So, I'm also struggling with how to manage using taxable vs 72t vs Roth conversions all while trying to stay under the ACA limit. I'm super nervous that I'll F it up, somehow. In the meantime, I'm trying to plow as much as possible into my taxable accounts.
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