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Post by Admin/YBB on Feb 10, 2022 11:15:58 GMT -6
One important exception for penalty-free early withdrawals (before age 59.5) from tax-deferred retirement accounts (IRA, 401k, 403b) is the uniform withdrawal method, called the 72T exception. In principle, this means withdrawing uniform amounts (monthly, quarterly or annual) based on a "reasonable" interest rate over the "life-expectancy", and once started, the withdrawals cannot be stopped until the later of 5 years or 59.5 age. To prevent abuses, the IRS has specified the "reasonable" rates and life-expectancies and the overall rules are quite complex. There have been some recent changes in these rules. First, after the modification of the RMD tables (effective 1/1/22), the IRS has also modified other life-expectancy tables. This is a slight negative for 72T as the new life-expectancies are bit higher and that will reduce the withdrawal amounts slightly. Another more significant change is in the "reasonable" interest rate - it can be higher of 120% of the federal midterm rate OR 5% (new). This rate modification is to account for rather low current rates now and will significantly increase the withdrawal amounts. But several things are unclear: The new rules are effective 1/1/23 but "may" be used for 72T started in 2022 (well then, why not say that they are effective in 2022? I suppose the vagueness is to allow either the old or new rules in 2022); the old 72T can be changed but it is unclear whether changes must be made only in 2022-23, or at any later time? M* article on new rules, www.morningstar.com/articles/1078475/new-irs-rules-help-young-ira-ownersOld IRS rules (link may change to new rules in future), www.irs.gov/retirement-plans/substantially-equal-periodic-payments
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Post by Admin/YBB on Feb 14, 2022 18:32:39 GMT -6
Kiplinger article has good summary on 72T details/rules and an example. ".....Mary is a 50-year-old divorcee who has reached $1 million in her 401(k) account, her retirement savings goal. She would like to retire, and she understands that if she uses the SEPP rule, at age 50 she’s committing to take these payments for approximately 10 years. She wants to use the calculation most favorable to her in terms of maximizing her withdrawal. Between the three methods, the fixed amortization method provides the largest permitted withdrawal.....Had she started her payments in December, before the new IRS rule, primarily because of the 1.52% interest rate her payment would have been $36,122. Applying the new rule however, with the 5% floor interest rate, her payment increases significantly to $60,312. There’s more that goes into the black box used in these calculations, but the net effect is a big change in what she can withdraw..... (CAUTIONS) First, recognize that while these payments, properly calculated and executed, avoid the 10% penalty, they are still subject to ordinary income taxation. Further, once you’ve committed to taking these distributions, with few exceptions, you’re obligated to stick with the withdrawals. Even if Mary at some point decides she doesn’t want these taxable payments, she has to take them until she reaches age 59½ – or suffer the 10% penalty on all her payments. While this sounds easy enough to live with, the reality is that over the years, it’s easy to make a mistake or miss a date. The result is a penalty on the whole transaction. In my mind, however, the biggest risk with SEPPs is that you’re committing to a strategy that may run out your retirement savings before you run out of oxygen. Just because you can now withdraw more each year doesn’t mean you can afford to draw that much. For example, if Mary withdraws $60,312 each year during the SEPP period, she will likely have depleted well over half of her $1 million retirement savings by the time she reaches age 60. She may live for decades longer, yet she will be starting her 60s with less than $500,000." www.kiplinger.com/retirement/604203/retiring-early-a-new-irs-rule-could-mean-more-money-in-your-pocket
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Post by Admin/YBB on Mar 7, 2023 9:32:34 GMT -6
Secure 2.0 provides some flexibility for 72T uniform withdrawals. www.morningstar.com/articles/1138268/how-secure-20-helps-protect-investors-from-penalties-and-excise-taxes"Transfers and rollovers will not cause a SEPP/72(t) to be “modified”: One of the exceptions to the 10% early distribution penalty applies to distributions taken under a substantially equal periodic payment, or SEPP, program—also known as 72(t) payment programs. These payments are subject to strict rules; breaking them would result in retroactive disqualification from receiving the waiver. For example, one of the rules prohibits transfer and rollover to or from an account running a 72(t) program unless the entire balance is rolled over or transferred to a new account. Secure 2.0 repeals that limitation effective for rollovers and transfers made after 2023—including allowing partial transfers and rollovers—providing the total payments for each year of the program equals the amount initially established under the program. (Effective for transfers and rollovers occurring after Dec. 31, 2023.) Recommendation: While Secure 2.0 permits partial transfers and rollover, IRA owners and plan participants should keep 72(t) account balances segregated from other amounts. Doing so will help to maintain the integrity of the program and avoid any risk of breaking any of the rules—particularly failing to withdraw no less or more than the payment amount due for a year."
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Post by Admin/YBB on Mar 9, 2023 12:01:09 GMT -6
More on 72T-SEPP under Secure 2.0Some related discussion at MFO* made me look at other sources for the 72T-SEPP modification. Ed Slott's IRA Help has a slightly different take on it. It says that previously, the entire IRA under 72T-SEPP had to be rolled over (say, to a different IRA provider/sponsor) but there couldn't be any other changes (in withdrawal amounts, or any additions/subtractions). But now, with Secure 2.0, the IRA under SEPP can be split, say, into 2 IRAs but the total withdrawal amount from both must be the same as the previous withdrawal amount. This is much more restrictive that what Denise Appleby’s M* article implies. The IRA holder must keep good detailed records and the IRS Form 5329 may have to be filed. The IRA sponsor may treat this as any other systematic withdrawal program with all the flexibilities, so the onus is on the IRA owner/holder to follow all the 72T-SEPP rules. Slott’s IRA Help www.irahelp.com/forum-post/74422-new-sepp-rulesOther Links www.wealthenhancement.com/s/blog/new-retirement-strategies-unpacking-the-secure-act-2-0-MC5B2ZL2AM5FFEFMFW2ZQ3O5CK4QIRS Form www.irs.gov/pub/irs-pdf/f5329.pdfIRS 72T-SEPP Q&A, revised 12/22/22, but the change isn’t mentioned www.irs.gov/retirement-plans/substantially-equal-periodic-payments *MFO Discussions www.mutualfundobserver.com/discuss/discussion/60765/72t-uniform-withdrawals
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Post by Admin/YBB on Jun 25, 2023 17:04:04 GMT -6
LIfetime Annuitization and 72T-SEPPThere was a question on FB TIAA Group by YBB (Facebook login required): Is lifetime annuitization an allowed exception for 72T? Whether lifetime annuity (before 59.5) may count as 72T exception depends on circumstances. The IRS allows 3 methods that include an "Annuitization Method" - it requires the use of reasonable a interest rate (not too high) for uniform distributions over life-expectancy; there are also restrictions on when such a program can be terminated (to prevent abuses from starting 72T and then suddenly stopping) and other restrictions on the account running the 72T-SEPP. Slightly different rules apply for qualified (401k/403b) and nonqualified (IRAs) accounts. Secure 2.0 has also simplified some rules. May be the lifetime annuity issuer can tell if a 72T exception would be applicable to its annuity (unlikely). Otherwise, the details on the 72T-SEPP payout calculations required by the IRS are not available. The best one can do then is to calculate the maximum payout allowed by the IRS rules for 72T-SEPP and then make sure that the annuity payment is less than that. An alternative would be to implement regular 72T-SEPP (before 59.5) and buy lifetime income annuity at the end of the 72T program. A later start for lifetime annuitization (in 60s or 70s) may be better anyway. Also keep good records. Ed Slott's IRA Help www.irahelp.com/forum-post/17941-lifetime-annuity-satisfy-72t-requirementKitces www.kitces.com/blog/rule-72t-sepp-calculate-payments-rmd-avoid-penalty-tax-early-ira-withdrawals-notice-2022-6/72&-SEPP Calculators www.bankrate.com/retirement/72-t-distribution-calculator/www.annuityexpertadvice.com/calculator/72t-calculator/A Sad case under the old Rules that didn't meet the requirements at the IRA account level (from which 72T-SEPP was taken) when multiple IRAs existed and the rules would have been OK for the consolidated IRA balance*. www.immediateannuities.com/annuity-library/annuity-purchase-avoiding-tax-penalty.html*Consolidating all T-IRAs for RMD calculations, but taking the entire RMD from one T-IRA is allowed. The account holder and his financial advisor thought that similar could work for the 72T-SEPP, but it didn't.
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