My Early Retirement SEPP 72t IRA Ends: How It Worked Out

My last SEPP 72t IRA payment was just delivered. I now close the door on government control over my early retirement funding. For the last 7.75 years I had IRA penalty free withdrawals using what the IRS calls substantially equal periodic payments (SEPP). I thought I would share how the IRA did from its original funding to its last payment to me.

I think this could be of interest whether anyone is considering a SEPP 72t approach to early retirement funding or not. It gives a glimpse into the impacts of investment allocation, a bad investment, and what a rigid withdrawal rate has on an IRA over several years of retirement funding.

SEPP 72t IRA Basics

The SEPP 72t is an IRS rule that allows someone to make pre-age 59 ½ withdrawals from an IRA without having to pay the early withdrawal 10% penalty. Only your normal income taxes would apply.

The IRS 72t rule dictates the withdrawal amount. It is based on current bond interests rates, your age and your life expectancy at the time of beginning the 72t. The idea is that your IRA would survive long enough to fund your retirement for your lifetime.

There are 3 IRS approved withdrawal methods and you can make one withdrawal method change during the life of the SEPP 72t.

The 72t payments must run its course once it begins for the longer of 5 years or you reach age 59 ½. In my case the run-time was to age 59 ½, making my 72t in play for 7 years and 9 months to complete my 72t run-time rule obligation.

Run afoul of their rules and the IRS will assess the 10% IRA early withdrawal penalty back to the very first SEPP 72t payment you received plus applicable interest. That applies even if the IRA fails before meeting the obligated run-time length rules. Careful investment allocation is advised so that a market crash doesn’t send the 72t IRA into funding default.

(Update 1/13/19: I made a mistake regarding an account being depleted as the IRS States: What is the effect of an account being completely depleted? If you have no assets remaining in your individual account plan or IRA, you will not be subject to the Code §72(t) tax as a result of not receiving substantially equal periodic payments. In addition, the recapture tax will not apply. I mistook explanations and missed this. Thanks Brian for pointing this out)

It is for these reasons I used a CFP to set up and manage my 72t IRA. It is advisable to not lockup all of your retirement IRA funds in a SEPP 72t. Always hold some of your retirement portfolio separate from the 72t.

 

My SEPP 72t IRA Details

My SEPP 72t began February 2010. At that time the IRS allowed 72t interest rate was around 3.5% to use in the SEPP calculation.

Looking today online at the SEPP 72t allowable set interest rate to use, it seems the allowable interest rate to use is 2.4% for December 2017 and estimated to be 2.54% for January 2018. The approved interest rate changes as bond rates reset.

72t IRA Balance Details

My SEPP 72t began Feb 2010 and ran until Nov 2017 = Obligated run-time 7 years, 9 Months.

72t IRA Beginning balance – $665,000

72t IRA Ending balance – $586,528

The 72t IRA Amounts Paid Out During IRS Obligated SEPP Timeline

72t IRA Early Retirement Income Paid – $260K

72t IRA CFP Fees (estimated) – $39K

Total Amount 72t paid out = $299K

Figuring Out The 72t IRA Results

The first observation is that the 72t IRA is down $78,472  (11.8%) from my initial investment. That may seem odd given the run-up in the stock market since February 2010 to now. There are a couple of issues that I believe addresses this result.

One of my investments (highlighted below) took a 40% dump. This represented a large part of the SEPP 72t IRA $78,472 deficiency when only looking at the beginning and ending totals.

The SEPP 72t withdrawal calculation used a bond interest rate of 3.5% within its algorithm. Bond rates were higher at that time than they are now. This resulted with what was a 5% withdrawal rate of the total funding SEPP IRA. There were no yearly inflation adjustments but this is still far higher than the well discussed 4% safe retirement withdrawal rate. That 4% rate is now challenged as being too aggressive as a safe withdrawal rate. A 5% withdrawal rate clearly has an impact on the portfolio.

The SEPP IRA was conservatively invested and designed to chase yield. It did not benefit as much as it could have had there been more stock exposure. This was done purposely. The rest of my portfolio outside of the SEPP 72t IRA was invested heavier in stocks. The overall portfolio was considered for an appropriate investment allocation when looking at stock to bond and international to US investment ratios. This was also done to avoid 72t default in the event of a stock market downturn.

Even after the above considerations, the SEPP 72t IRA produced enough income and growth to pay out $220.5K overall ($299K paid out minus the $78.5K beginning to ending IRA balance deficiency).

How My SEPP 72t Was Invested

Please note that the 72t IRA had investment changes over it’s 7.75 year run and this is the current (11/24/17)snapshot/reported yield.

Cash = $34,066

Investment Mutual/UIT Funds = $552,462

Total SEPP IRA Value = $586,528

Invested Mutual/UIT Funds

ACETX – INVESCO EQUITY & INCOME $40,509.06 (7.33% of 72t)  Yield 1.76%

BIICX – BLACKROCK MULTI ASSET INCOME INSTL $29,362.14 (5.31% of 72t) Yield 4.5%

DIFIX – MFS DIVERSIFIED INCOME $29,881.61 (5.41% of 72t) Yield 3.2%

FGIYX – NUVEEN GLOBAL INFRA $35,119.09 (6.36% of 72t) Yield 2.76%

FRIRX – FIDELITY ADVISOR REAL ESTATE INCOME $37,563.30 (6.8% of 72t) Yield 4.08%

FSRIX – FIDELITY ADVISOR STRATEGIC INCOME $94,852.42 (17.17% of 72t) Yield 3.18%

MBDIX – MFS CORPORATE BOND $67,315.98 (12.18% of 72t) Yield 3.38%

MLPOX – OPPENHEIMER STEELPATH MLP ALPHA $19,307.78 (3.49% of 72t) Yield 8.1%

OIBYX – OPPENHEIMER INTL BOND $59,600.10 (10.79% of 72t) Yield 4.18%

OOSYX – OPPENHEIMER SENIOR FLOATING RATE $57,604.36 (10.42% of 72t) Yield 4.44%

PXHIX – PAX WORLD HIGH YIELD BOND INSTL $81,346.39 (14.72% of 72t) Yield 5.46%

 

In Closing

It’s easy to see that a higher IRA withdrawal rate, an investment loss, and a yield focused conservative investment allocation can result in a lower portfolio balance regardless of any prolonged market recovery.

As I move into Phase 2 of my early retirement funding plans I will be using what was learned from the first 7.75 years of my SEPP 72t. I happily look forward to being able to have more control over my retirement account withdrawals going forward.

After considering everything, I do believe this was an early retirement funding success. I have enjoyed this adventure called early retirement much more than I could have imagined.

Using the SEPP 72t IRA rules to allow early access to my retirement accounts without penalty was definitely a successful strategy for my situation.

46 thoughts on “My Early Retirement SEPP 72t IRA Ends: How It Worked Out

  1. Happy 59.5! I like the personal stories of how some of these unusual programs work. It is strange that you need both a CFP and an ability to even know the program exists-like so much about retirement. Glad it was a success.

    1. Thanks for the comment James. My CFP clued me into SEPP 72t for early retirement in the days before the internet was in every home. It doesn’t seem to be talked too much about even now. Even with today’s low bond interest rates it’s a good option for anyone heavy on retirement accounts and short in other investments/savings to look at to help fund their early retirement. There is always something new to learn when it comes to retirement.
      Tommy

  2. I am happy it worked out for you, brother. I am looking forward to 2 years from now. When My first 72T expires and I am 59 1/2. The second one I took out will still have 2 years on it but that is OK.

  3. Well done! Thank you so much for such a detailed article. I am lucky to find out your post and getting a lots of useful and interesting information from it. I am too young to think about retirement, but I am interested in welfare distribution and other economic or social issues. Please keep writing and sharing with us! God Bless you!

    1. Thanks for the comment Best MFP. I’m glad you enjoyed my detail heavy article. I don’t think you can ever be too young to think about retirement, at least when it comes to saving for it. But I do understand what you mean. I didn’t give it much thought except for contributing enough to get my company’s 401K pension-savings match. I was age 40 when I started to really get serious about my “future me” and saving as much as possible.
      Tommy

  4. Sounds like a good tool to have available if your assets are retirement heavy and you need access to it early and can be careful about following the rules. I probably won’t go that route but will keep it in mind if something changes for me. Thanks for the reminder.

    1. Thanks for the comment Arrgo. I was certainly way too heavy with tax differed retirement accounts when I retired early. If done carefully the 72t is a good and measured way to access money those accounts before age 59 1/2.
      Tommy

  5. Tommy – thanks for sharing! I am getting ready to start my SEPP this coming June 2018. I was a bit surprised about the CFP fees of $39K. I have pretty all my money at Vanguard and I just need to validate my withdrawal amount and set up a schedule to avoid penalties. I am not sure if the tax season is messing me up; but there is very little help out there to just set this up.

    1. Thanks for the comment Ricky. I think the $39K CFP fees over the 8 years was mostly fair given the amount of help, guidance, and risk management they did for me. Some of my accounts had a 1% wrap fee and others had less or none. That said, it would have been nice not having to pay it and just handled it myself using Vanguard like you are doing. I still can’t complain as everything worked out wonderfully. If you run into trouble finding assistance be sure to review everything on https://72t.net/72t/Calculator/Distributions They are a good SEPP 72t resource. Good luck with setting up your penalty free early retirement funding and everything else that you will be doing.
      Tommy

      1. Am I missing something here? It looks like you lost more money paying CFP fees than if you just would have payed the 10% penalty for early withdraw before 59.5?

        72t IRA Early Retirement Income Paid – $260K at 10% = $26K – which is much less than $39K

        1. Thanks for the comment Brian. You are correct. I wasn’t clear in the post what the fees paid covered. The CFP fees paid were for my entire portfolio that they managed for me, not just the 72t IRA. We negotiated a fee structure where fees were charged and came out of the taxable Sepp IRA funds (as nontaxable fees), and then my tax free ROTHs and another IRA that they also managed had no fees. Even if my fee structure was split differently where the SEPP 72t specific fees to early withdrawal penalty was a break-even, I still feel I received value for their management and monthly/yearly administration of the SEPP 72t. I could have handled this myself and be spared of any fees, many do, but I wanted professional assistance to get the 72t right and help guide me with the rest of my portfolio. I was and am happy overall with my CFP’s work. Now that I am free of the 72t and its administration I’ve been able to negotiate far less in overall CFP fees. Perhaps because of the years in the 72t and strengthening our relationship, perhaps because it’s easier for me walk away now. I have my reasons for using a CFP so I accept that there is a cost for having that. Many people love going it on their own and they can save themselves money by doing so.
          Tommy

  6. I’ve first heard of SEPP’s today and it looks like the answer for my situation. I’m only 30. I am on track to have $1.2 million at 40 years old (give or take a year or 2), with the combination of my 401k and an ESOP retirement account. The ESOP can’t be moved out of company stock until 3 years after leaving the company and then they will make 5 equal payments (8 years total after leaving company I will be “cashed out”). Assuming I leave the company around 40 and find another job for 10 years, I will have the ESOP money all in my 401k account. The $1.2 million at 40 should’ve grown to $1.75-2 million by the time I am 50.
    As far as I can tell I will get around $70k/year for 9 years until I’m 59.5 years old. At the end of 9 years I’m still left with $1.5+ million. Does this sound correct? It seems like it’s too good to be true? What are the risks involved with this distribution method?

    1. Thanks for the comment Michael. Sounds like you have a solid plan ahead of you. Running your numbers on the 72t calculator using today’s calculation interest rate (http://www.imagisoft.com/equal/federalmidtermrates.html) of 3.44% and a 4% rate of return, your estimation sounds about right. However, your plan is 20 years out so the interest rate for the calculation, which is a big factor in allowable Sepp 72t payout is unknown. It depends on the bond rates at the time when the 72t will begin. That and the Sepp 72t rules can change in the next 2 decades so you should keep a watchful eye on anything 72t related as you continue on your plan. The risk of 72t is you are locked into the arrangement for 5 years or age 59 1/2 (whichever is longer) and if a major market event occurs that negatively impacts your 72t IRA portfolio for any length of time, your outflows can heavily damage the portfolio. Going into 72t default would cause penalty back to day one of your payments. The calculation results showing the amount left at the end of your 72t time-frame assumes a solid 4% a year return, not a year or more where it may be severely negative. If you must you are allowed a onetime distribution change and could go to the minimum dist method to save the 72t. That’s why I didn’t put all of my IRA/401K money in my 72t. That way I had other sources of funds to supplement any such scenario that decreased my 72t outflow to me. It also allows for creating a separate 72t later (more or less a 72t ladder) if more penalty free funds are needed before age 59 1/2. I used my trusted CFP to help set my 72t up for me. I recommend talking to a finance professional when you are finally ready to pull the trigger. Diversification is key, and that includes not having all your tax differed retirement money in a single 72t account.
      Tommy

      1. Thanks for the reply. I will need to watch the SEPP 72t rule changes. Is there any organizations that champion this rule that I should follow? For instance there are ESOP organizations that make sure politicians realize how important ESOPs are to employees and their future retirements that I follow to hear about upcoming legislation. So I would be able to choose how much of my 401k to move into a 72t account when that time comes?

        I think going forward it would make more sense to put 4% into 401k for company match and the remaining into something that I could have better access to before normal retirement age…. what do you suggest?

        1. Hey Michael, welcome back. I don’t know if there are any groups who advocate for the Sepp 72t. I could only suggest looking online for new articles related to whether any changes have been made or keep checking the federal gov website (https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments). Other than that, tax and financial planning professionals will have to stay current with it’s rules. Your 4% to 401k question depends on many things. How you benefit from deferred tax benefits now, whether you have the option of ROTH 401K, etc., all play into that decision. I made my numbers by first maxing out my yearly 401K contributions every year and doing other investing outside of my 401K in ROTH IRAs and savings account so I can’t agree with your 4% only plan based on anything from my own experience. Unless of course 4% of your income does max out your 401k contribution. You do get to choose the amount for your 72t IRA. If you retire at age 50, you would be able to rollover your 401K to an IRA. Then you would simply roll whatever amount from that IRA that you want into your newly created Sepp 72t IRA. It would be completely separate and the amount you start it with is totally up to you. At anytime you could roll more money out from your initial non-72t IRA to create additional 72t IRAs if penalty free access is needed to fund your early retirement. I was 40 when I decided early retirement was my goal so I sought the advise of a CFP (certified financial planner) to help me create my 10 year plan and know all of my options to maximize my savings. It was the best thing I could have ever done. I think you could greatly benefit by doing the same.
          Tommy

          1. Tommy, based on the unknowns with where the SEPP 72t is going to be in 20 years, wouldn’t it be wise for me to invest just enough to get my employer match for my ROTH 401k and use the rest of my savings for an investment that would be easier for me to access for early retirement? Would there be anything wrong with investing the rest of my savings into a normal portfolio of mutual funds with an online brokerage? Isn’t this money easier to access? or would the tax savings of an IRA make it better to invest into a retirement specific account?

            Thanks for answering my questions!

          2. Hey Michael, nothing wrong with that approach. Sepp 72t is the law today and there is no reason known why it would go away. I only mentioned possible changes as a caveat because of your long runway. It is always better to rely on non retirement tax deferred accounts for early retirement as IRAs/401Ks can grow within the tax deferred benefit until needed. 72t is a backdoor way to access your 401k-IRA savings penalty free if needed. I was heavy on 401K/IRA savings and needed the 72t. You have a some years to fine-tune your plan to have savings in and out of tax deferred and regulated retirement accounts. I suggest since much depends on your income, taxes both now and in retirement, and your specific retirement desires, talking to a CFP would be a big help.
            Tommy
            Tommy

  7. Tommy – quick question about your investment changes during your 72t. I started my 72t this year with an IRA tracking the S&P 500. I’ve tried to find an IRS ruling on whether or not I can switch my investment option (say to a Treasury based IRA with the same custodian) and I couldn’t find anything about it other than the IRS rule that states you cannot add to or subtract from the IRA balance. If I transfer the entire amount to a different investment with the same custodian do you think that would break my 72t?

    1. Hey Jeffrey, based on what I did and know the IRS only cares about the IRA as a total amount dedicated to the 72t and you can change investment direction within it as much as you want or need to. They have no say or concern on the investment direction you choose within it. They base the amount of 72t payment schedule on the allowable interest rate to use on current bond rates but don’t dictate your investment choices. I changed my investments within my 72t IRA a few times during the years it was serving my early retirement funding. All they really care about is that it last as long as your 72t required time-frame.
      Tommy

  8. Hey Tommy- Your article was very informative, and it is so good to hear a success story from someone who has used the 72(t) plan. My father also used this method to fund his early retirement, and I plan to follow suit as well. So, I am 49 and am getting ready to set mine up almost exactly like you did. I will be using either the amortization or annuity method to calculate my annual distributions.
    My question for you is this:
    When you took distributions each year, did you take one distribution annually and put it into cash (and then take from that as you needed money through the year), or did you take monthly distributions from the IRA investments (basically selling stocks/bonds from your IRA each month) that were then transferred to your checking/savings?
    I am just trying to figure out the best strategy for 72(t) distributions to avoid having to potentially liquidate active investments during “down” periods in the market. I have considered having a few years of “salary” resources in cash (still within the same IRA), and then just moving the annual required 72(t) distribution amount to this IRA money market (cash) during “bull market” years, and then paying myself my “salary” from that money market/cash account (again, all still within the same IRA).
    In my mind, this way, if the market collapsed during my 72(t) tenure, I could just continue to pay myself the required distribution from cash reserves and “ride out the storm”, and then just move money back into my cash reserves to replenish what I had paid myself, once markets recover. Is this maybe similar to how you handled distributions?

    1. Thanks for the comment Jeff. I took monthly distributions. They were electronically transferred to my checking account. My CFP established a cash bucket within my 72t IRA that distributions were made from. It would have from 6 months to a year’s worth of cash in it. Some cash came from dividends and interest paid and some from harvesting profits when appropriate or during account rebalancing. It looks like you have a solid plan worked out. 72t worked well for me and was a good early retirement solution to fund my lifestyle until age 59 1/2 without early withdrawal penalties. Congrats on your early retirement!
      Tommy

  9. Hi Tommy
    Great article. My one question to you is, do you need to yearly or even sooner, adjust the interest rate, or is it fixed for the 5 years of the 72T?

    1. Bob, it is fixed at the time you start it. You do have the option of making one distribution change during the life of the 72t to the minimum distribution method if the economy and your 72t IRA gets damaged as a move to save it from default. Otherwise you set it and let it roll. That’s why it is a good idea to not have all your money in the 72t. If you think interest rates for the calculation will climb you can consider laddering with multiple 72ts.
      Tommy

  10. Hello Tommy, thank you for writing this article and shedding some light on this subject. I have a few questions.

    I am in my late 20s and think I can pull off retiring sometime in my 40s with 1,000,000 in just the 401k if everything keeps going the way it has been. I started contributing to my 401k lightly at 19, 11% total at 21, and 17% total at 23 and for the last 5 years. I am now focusing on trying to max the 401k before the match, and try to start getting some money into a Roth.

    What exactly is the “interest rate” involved with the 72t SEPP? Is it money that you pay to an entity in the form of an additional tax? Or is it simply a formula that the government has created to tell you how much you can take from your 72t?

    Looking at the Amortization numbers, it looks like the SEPP interest rate for my current calculations at age 28 with a hypothetical $1,000,000 is 3.69%. Using the Amortization method they say that would be $42,650 annually. When I get to this point I would like to withdraw a total of 3% to 4% of my total portfolio amount so that in theory the balance should continue to grow as years go on, instead of lose money. I don’t like the idea of the retirement account losing value, and I think it is important for it to gain value as the years go on based on 10 year averages.

    Would it be possible for me to choose to withdraw $35,000 (or another number in the 30k-40k range) annually on that 1,000,000 total balance instead of the recommended $42,650.

    I have been trying to figure out how I should invest for this early retirement goal. The 72t option seems to be a nice way to avoid that 10% penalty, but in a pinch I think I could swing the 10% penalty if I plan for it. The important thing about the penalty is it is a penalty on the amount withdrawn annually, and not the total portfolio. So instead of a detrimental 10% penalty on $1,000,000 which would be $100,000 that first year, it is a penalty on my $40,000 withdrawal, which would be $4,000. Which would equate to being a rather nominal 0.4% penalty instead of a retirement destroying actual 10% total.

    With that being said, if I can choose any amount up to the amount they are recommending I take ($42,650 as of now) and there aren’t any other fees involved, then I think it would be worth starting early retirement with the 72t abiding by the 4% or less rule with a 60% stock and 40% bond mix. Then if things start to get really bad then I can either use the 1 time change to the RMD rule and cut my annual payments in half, which will still keep income coming in, and now my retirement account should have a very high likelihood of surviving while still keeping the bills paid. Or I can simply begin making dynamic updates as needed and simply paying the penalty. Both options will in theory have an extremely high likelyhood of saving the retirement account, and if I wanted to, I can begin a new 72t when the market turns around if I want to avoid my 0.4% penalty.

    I am also keeping in mind that the 4% rule to my understanding so far is supposed to be assuming withdrawals are based on a total portfolio balance ($1,000,000 for a rounded number) at the height of a business cycle, and then going into an immediate decline that ends up going into a recession over the next few years. Then as the business cycle comes around and begins the upswing, should make back everything lost and end up ahead. Can you confirm this if you know for sure?

    With all this being said, if I opened a brokerage and backed off the 401k, my understanding is that I would have to pay 15% capital gains taxes on the gains on my after tax money I put into that account. So if I am doing the math right in my head, it sounds like it would be better to just pay the 10% early withdrawal penalty on my 401k even if the 72t doesn’t work out than it would be to deal with the tax implications on my after tax funded brokerage account. Do you have any thoughts?
    ____________________
    Summary: Since I ended up rambling

    Is the interest rate a fee that must be paid? Or is it just for figuring out how much someone can withdraw?

    Can I choose to withdraw any amount above the RMD and under the interest rate? ($35,000 instead of $42,650)

    Is the 4% rule based on withdrawing at the worst possible time in the business cycle and still being able to remain retired and end up with more money as the years go on?

    With all this being said, should I focus on maxing my tax deferred 401k and a separate Roth IRA if I can come up with additional money? Or should I pile into a brokerage as well? Thinking all of this through it sounds like the brokerage should be only after I max everything else out.

    1. Thanks for the comment John. First off I am not a financial planner but here is how it was explained and worked for me. I will try to answer your questions—
      Is the interest rate a fee that must be paid? Or is it just for figuring out how much someone can withdraw?

      It is to figure out how much can be distributed to you (withdrawn) based on government guidelines to ensure the 72t will last.

      Can I choose to withdraw any amount above the RMD and under the interest rate? ($35,000 instead of $42,650)

      I don’t know but assume you could use an interest rate less than the government guideline for the month you want to start your 72t for the life of your 72t. I would think it better to just not put all your $1m in a single 72t IRA. Your entire $1m would be locked up for the life of the 72t and it doesn’t need to. You could use the calculator https://72t.net/72t/Calculator/Distributions (update 2020, this site is no longer up), fill in your info, run the numbers, and then after your results use the “Reverse Calculator” option in the left column where you can see what you need in a 72t for your desired $35k a year distribution. In the test I did someone age 45 w/$1m starting 72t 1/2019 would get $48K year. By using reverse calc with a desired $35K year dist you would only put $716K in the 72t. Then you can leave the remaining $284k of your $1m separate in a non 72t IRA to use as needed or set up a 72t ladder with later on.

      Is the 4% rule based on withdrawing at the worst possible time in the business cycle and still being able to remain retired and end up with more money as the years go on?

      It is based on current bond interest rates and an algorithm containing your current age and amount invested to predict it will last as long as you do according to their actuary table. Basically be zero at death. At least that is how it was explained to me. It assumes a conservative investment strategy. So it could end up higher or be lost depending on how you invest within your 72t IRA. You can change investment direction within the 72t any way or any time you want. It’s the distribution that is restricted for the life of the 72t.

      With all this being said, should I focus on maxing my tax deferred 401k and a separate Roth IRA if I can come up with additional money? Or should I pile into a brokerage as well? Thinking all of this through it sounds like the brokerage should be only after I max everything else out.

      I went the 401k and Roth IRA route 100% first, then with what I could went to debt elimination and non-retirement accounts. I never regret being debt free but I regret not setting aside more in non-retirement accounts. Figuring out the right amount is the tough decision. There are so many ways to do this and other things to consider including later Roth conversions, tax rate, etc. This question would be better asked of a CFP you trust who can evaluate your specific financial situation and goals. They could also answer your 72t questions, However, you are a long way still from 72t and laws can change so stay knowledgeable about all things retirement financial.
      Tommy

      1. Thank you for the information Tommy!

        Once the 72t is activated, is it in an account called a 72t IRA?

        So basically I would choose how much of my principal from the 401k to put into the 72t and choose how to invest it, much like a traditional IRA, except I would be drawing from the 72t account itself? Could I choose to invest in stocks or a mix rather than just bonds? Or is one of the stipulations of being in a 72t that you have to invest in bonds?

        Your main reasoning to not put everything into the original 72t seems to be to possibly do a 72t bridge one day correct? What would be the benefit of doing that? Is it not a good idea to put the entire balance into the 72t?

        Another way to look at the interest rate, is if I have to use their interest rate to withdraw, I could just put less money into it and let the 401k continue compounding. I would possibly lose some money in the 72t account, but I could combine it and the 401k once I reach 59.5, so it would probably work out in the wash. I do think that I could choose a smaller interest rate based on what I have read Since they say I cannot exceed 120%.

        I am learning more about the 72t/SEPP here than anywhere else I have looked online. There is not too much info out there about this, which makes it hard to plan.

        1. Hey John, you can invest within the Sepp 72t (that’s what they call it) anyway you want to and make any investment changes within in anytime you need to. You just can’t add money to it or take more out of it. However, you don’t want to invest poorly where it would go bust/zero-out before hitting 59 1/2 or you will have to pay the 10% penalty all the way back to day one.
          The 72t is just a way to get to your IRA money before age 59 1/2 without penalty if you need to. In my case most of my portfolio was in IRAs so I had few choices. Planning years in advance could result in other ways than relying on 72t. Like saving outside of retirement (401K/IRA) accounts to use until age 59 1/2, etc.
          The only reason to lock up all your funds within 72t is if you need to in order to get enough income. Since your numbers and income needs can easily be met with less locked up in a 72t, you are better off not tying up all of your portfolio like that.
          The 72t bridge is just an option you would have if before reaching 59 1/2 you require more money than the first 72t distributes. I kept out a portion of my IRA portfolio outside my 72t to keep options. With a long early retirement it is nice to have other funds available that have more flexibility, just in case.
          Tommy

  11. Hi!-
    Quick question or two. 🙂
    1. Is the interest rate determined each year. Example if it is 3.5% for 2019 and 4 for 2020 do I make the change each year or am I locked in?
    2. I turn 52 in a few weeks, is I assume my last distribution would take place the year I turn 59 whic is 2026 ( It would be July of that year).

    Thanks for the input

    1. Thanks for the comment RTJ. First off I am not a financial planner but here is how it was explained and worked for me. The interest rate used is set monthly based on government guidelines. You would use the said interest rate once and lock in for the life of the 72t in the month you start your 72t based on the government advised interest rate. The 72t must run 5 years or age 59 1/2, which ever is longest. In your case starting at age 52 through the month you turn age 59 1/2.
      Tommy

  12. Thanks Tommy
    SO If I took out the lump sum on the year I turned 59.5 I am all set. So 2026 would be the last year if I did once a year withdrawals vs monthy.

    1. Hey RTJ, the SEPP 72t (Substantially equal periodic payments) required distribution can be prorated monthly so depending on the month of the year you turn 59 1/2 you could adjust to distribute only what you are required to instead of the full yearly distribution amount. I did monthly distributions and had my last one in the month of my age 59 1/2 milestone. Update: I need to say that my payments may have been adjusted over the entire life of my 72t to meet a full years distribution SEPP 72t requirement. It was never mentioned how my monthly payment was calculated. It’s not clear to me that if you reach age 59 1/2 anytime before Dec that a full years distribution would be required. That is why I left this to a profession CFP to handle.
      Tommy

  13. Thanks So for example if I use 12k as my number I should just take out 1k a month and then July 26 ( I was born 1/26) I could stop the 1k once i was 59.5

    1. RTJ, You would take the last $1k distribution in the month 7/26 that you hit 59 1/2. Aug/26 you can withdrawal penalty free. That is how mine was set up to do. Update: I need to say that my payments may have been adjusted over the entire life of my 72t to meet a full years distribution SEPP 72t requirement. It was never mentioned how my monthly payment was calculated. It’s not clear to me that if you reach age 59 1/2 anytime before Dec that a full years distribution, in your example $12K, would still be required in that year. These complexities is why I left this to a profession CFP to handle.
      Tommy

  14. Thank you for this post.

    Given my potentially long SEPP timeline (~18 years), I was a bit scared by your assertion that the 10% penalty applied ” even if the IRA fails before meeting the obligated run-time length rules.” Having just checked out the IRS website, I think this is incorrect.

    “What is the effect of an account being completely depleted?

    If you have no assets remaining in your individual account plan or IRA, you will not be subject to the Code §72(t) tax as a result of not receiving substantially equal periodic payments. In addition, the recapture tax will not apply.”

    https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments#8

    1. Thank you Brian for pointing that out. It was either explained to me in error or I mistook it and should have caught the IRS faq. I have made adjustments to the post to remove that concern.
      Tommy

  15. Hi tommy, thanks for sharing your experience. My question is, the calculated amount for the SEPP, is that based on your whole ira portfolio in all accounts (assuming you have multiple accounts) or is that only the amount in the IRA account you plan to do the distributions from?

    For example, if the numbers work out to 35k per year on a total $1 mil profile, can you just put 600k or whichever amount into the distribution account, but still pull out the full $35k?

    1. Thanks for the comment George. The $35k would have to be based on the amount within the SEPP IRA only. For example, if you had $1mm total in assets and it took $750K based on the IRS allowed going interest rate within the 72t calculation to get $35K a year then all $750K would need to be inside the SEPP 72t IRA. The other $250K of your (this example) $1mm assets would be outside the SEPP 72t IRA and not part of the equation.
      Tommy

  16. As a early retirement planner just now retired at 54, I’ve been studying and planning my SEPP 72t withdrawals for several years now and look at the calculations a bit more conservatively than others it seems applying the well known 4% safe withdrawal rate in the calculation. So say you have a IRA of $500,000 you want to SEPP, I would use a lower percentage rate calculation, say for example this Dec-Jan 2019-2020 rate of 2.03% and use something closer to 1.25% instead to approximate a 4% withdrawal rate to avoid depleting the IRA. What am I missing?

  17. Here’s my situation. My birthday is April 20. I started taking periodic payments on September 15, 2015 at age 53. I will be 59 1/2 in October 2021. Is a distribution necessary in 2021? This sounds simple enough but I’d like clarification. Thanks much.
    Brian

    1. Brian, I would say yes from what I understand. It is almost a full year by Oct 2021. Check with a CFP or where you have your 72t IRA established to be 100% certain. per IRS
      https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments
      Fixed annuitization method
      The fixed annuitization method consists of an account balance, an annuity factor and an annual payment. The annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
      Tommy

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