Yeah, it’s not the last year to do a ROTH conversion for most folks. So, pick and choose if you’re near retirement or have any predictable lower income comings coming.
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US Resident Early Retirement Strategies
- Thread starter mongo
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For anyone considering a SEPP 72T plan, the IRS just updated their guidance. An interest rate of up to 5% can now be used to calculate the withdrawal (instead of ~1.5% in recent months), meaning almost 6% of the highest balance since 12/31/21 can be taken out each year. Link:
Woah! Great find!
Well, there goes the only reason I was happy interest rates went up...
Same here. I went from trying to figure out how to maximize my withdrawal to now trying to figure out how much I should take without risking busting the account.
Well, now that RMD is less than than annualized and amortized, you can use that at a backstop (though there is no penalty if you don't switch and the account goes to zero). Otherwise, the major downsides of overwithdrawl is effective tax rate and that earnings on excess are taxed.
Would this work? Figure the amount you need, and set up a separate IRA designated as the 72t source with a balance based on the 5% rate. That seems to give more options in the future than a large account at a low rate.
I'm looking at a 19-year SEPP and it wouldn't be the end of the world if I took out 5%/year and depleted the account, because I'd gain access to my Roth around that time. Of course, I expect more like 10-50%/year returns with TSLA but that's obviously not guaranteed and can't be used for conservative estimates.
But I was hoping to add my Roth balance to my SEPP balance to increase my annual withdrawal, while only pulling from my SEPP because of the tax consequences of the Roth withdrawals. This would be a great annual cash flow but would be almost 10% withdrawn/year from the IRA. And if I were to bust the IRA before 19 years, I would have to start withdrawals from my Roth, which would be taxed and penalized 10%.
I think the smartest thing to do is to go by the IRA balance and leave the Roth out - but that leaves me in a familiar position of wanting to wait longer for the stock price to up. Which is harder to do after the last few weeks and I'm not sure when I'll be able to exceed my Jan 3rd balance.
Post-tax contributions to your Roth can always be pulled out tax and penalty free. Only pulling earnings early causes fees and tax.
Have you looked into a Roth ladder? If there would be surplus from an IRA only 72t, that could cover taxes on the rollovers. Conversion amounts are penalty free after 5 years, which gives you more options if the IRA dries up (which would take 15ish years at zero growth). With the market down, it may be a decent time to roll.
Don't forget that if you're doing a rule 72(t) SEPP, the "RMD" method is not a minimum, but an exact number. The IRS updated the mortality table for this year and reduced the amount that will be withdrawn (as compared to last year's table). I'll be 53 this year so my dictated withdrawal rate is 2.99% (100 / 33.4 = 2.99%) of my account value on 12/31/2021. If you have 19 years of SEPP coming, then your rate will be lower than that.
Check out the second table here: New 2022 IRS Life Expectancy Tables Available Here | Ed Slott and Company, LLC
Expanding the concept (which may not make sense)
Split Roth into contributed and earnings accounts.
Split IRA into 72t and unallocated accounts
Set up 72t with IRA and Roth earnings as the value
Pull 72t from IRA, use extra to roll from the other IRA to Roth.
Downside is if the IRA is depleted you must pull from the Roth earnings and pay taxes on those amounts.
I have only earnings left in my Roth now, so the only way to get contributions would be to rollover from my IRA. This isn't a great option because I want cash now and to not pay any extra tax as I'm still working this year.
I like the idea of splitting the IRA, to get some money now but to keep the rest available to appreciate for a future SEPP at a hopefully higher balance. It wouldn't have been enough before the change to 5%.
Would it make sense to try to maximize the withdrawals to intentionally deplete the account and bust the plan? Instead of trying to be conservative and babysit it for 19 years. I would use most of the proceeds of the withdrawals to sell puts for income.
Example with made-up numbers: Say I had a balance of 1M on 1/3/21 that is now 800k. If I transfer 750k to a different IRA, that leaves me a $50k actual balance, but I think* I can claim a $250,000 basis (1M - 750k). So I could take ~14,000/year out against my 50,000 balance, maybe busting it in 4 years. If it keeps going, great. If not, I still have the $750,000 to do another SEPP.
*"The account balance is decreased by distributions made in the valuation calendar year after the valuation date." 26 CFR § 1.401(a)(9)-5 - Required minimum distributions from defined contribution plans.
All of this is not advice, I'm not an accountant.
Any pulls will be taxed. Although, if you wait till Q4 to pull money, the tax is not due until the Q4 estimated date in January.
I don't think claiming a $50k balance as $250k would be looked upon favorably.
Critical factor with a 72t is that, once started, the only action you can take without retroactive penalty is switching to the RMD method. If need to pull more in the future and RMD isn't more than your current method, you're stuck.
Favorably or not, a $250k account balance earlier in the calendar year, even if that has fallen to a current $50k, can be used per IRS guidance. And that’s equivalent to a $1M balance that has fallen to $800k and also had $750k transferred out before the SEPP was started.
An account that lost value is one thing, an account that had monies removed from the baseline amount is another. Extra funds cannot be pulled from an 72t account without penalty, and I don't see how that wouldn't apply. If the 50k of assets left in the account were originally worth 5x, that would be valid, but I sure hope you didn't take 80% losses.
Couldn’t one then convert to an RMD model and take out as much as they want.. obviously, it’s all taxable INCOME but then there would’t be penalites above EI taxes.. of course, no going BACK to a 72T model after that?
Oh, I see the confusion !
The calculation is the same as a normal IRA, but for a 72t the RMD is the exact amount you must pull out, not a lower bound.
Otherwise, one could pull their entire balance at any point in time.
Substantially Equal Periodic Payments | Internal Revenue Service
I’m talking about establishing an account balance prior to starting the 72T.
I had the highest balance on Jan 3rd, call it x. If I now split up the IRA and transfer out y dollars, the account balance I can now use is x-y.
Given that I do have about 20% loss in that account since Jan 3, I am then looking at an actual balance of 0.8x-y.
If y = 0.75x, then the actual account balance is 0.05x but I am using a nominal 0.25x account balance to establish the withdrawal.
It's up to you what you do, but here's what the IRS says:
IRS: https://www.irs.gov/pub/irs-drop/rr-02-62.pdf
>What was the starting balance of the account used for the 72t?
<250k
>And what date did you use?
<Jan 1st
>Your account statement shows the balance on January 1st was 1million. You do realize transfering funds out of a 72t account defaults the qualified status.
<...
<Jan 28th
>Your account statement shows your balance on January 28th was 50k. Why did you claim it was 250k?
<...
<250k
>And what date did you use?
<Jan 1st
>Your account statement shows the balance on January 1st was 1million. You do realize transfering funds out of a 72t account defaults the qualified status.
<...
<Jan 28th
>Your account statement shows your balance on January 28th was 50k. Why did you claim it was 250k?
<...
<The 72T plan was not actually initiated until say 1/30/22. The balance used is that of 1/3/22 less the 750k that was transferred out on say 1/24. Any balance between 12/31/21 and the date of 72T initiation in 2022 can be used, per IRS guidelines:
"For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution."
Any withdrawal that occurs after that account balance was achieved but before the 72T is initiated is subtracted from that 1/3/22 account balance, per IRS guidelines:
"(c) The account balance is decreased by distributions made in the valuation calendar year after the valuation date." https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-5
<I claimed it was 1M on 1/3/22 minus 750k on 1/24/22, consistent with IRS guidelines.
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That section is in the context of a normal 401 RMD, I believe (look at code section). Normal RMDs just pull a new balance every year and any withdrawl of at least RMD is fine. 72(t) plans are SEPPs with tigheter rules.
Your link:
SEPP rules:
26 U.S. Code § 72 - Annuities; certain proceeds of endowment and life insurance contracts
Per the pdf you linked to and I quoted above, that is not correct (again, SEPP, not standard RMD). You are stating that you would be transferring part of the account after the account balance date. How would 3.02(e) not apply?
...
(e) Changes to account balance. Under all three methods, substantially equal periodic payments are first calculated with respect to an account balance as of the first valuation date selected as described in section 3.02(d) of this notice. A modification to the series of payments will occur if, after such date, there is (1) any addition to the account balance other than by reason of investment experience, (2) any transfer of a portion of the account balance to another retirement plan, or (3) a rollover of the amount received by the employee.
...
If there is a modification, the penalty kicks in per 2.04:
...
.04 Section 72(t)(4) provides that if a distribution is excepted from the 10% additional tax because the distribution is part of a series of substantially equal periodic payments as described in section 72(t)(2)(A)(iv) and that series of payments is subsequently modified (other than by reason of death, disability, or a distribution to which section 72(t)(10) applies) before the end of the 5-year period beginning on the date of the first payment, or before the employee attains age 59½, the employee's tax for the first year of the modification is increased by an amount equal to the tax that, but for the exception in section 72(t)(2)(A)(iv), would have been imposed, plus interest for the deferral period.
...
From SEPP rules:
...
Deferral period:
(B) Deferral period
For purposes of this paragraph, the term “deferral period” means the period beginning with the taxable year in which (without regard to paragraph (2)(A)(iv)) the distribution would have been includible in gross income and ending with the taxable year in which the modification described in subparagraph (A) occurs.
...
So, changing the balance is a modification and causes all previously avoided tax and penalty to that date to be due. In other words, if you pulled money before the transfer, it is penalized; and the new balance would be used going forward.
I am going off this from https://www.irs.gov/pub/irs-drop/n-22-06.pdf:
"(d) Account balance. For purposes of applying the required minimum distribution method, the account balance for a distribution year is determined under § 1.401(a)(9)-5. 8 For the fixed amortization and fixed annuitization methods, the account balance must be determined in a reasonable manner based on the facts and circumstances. The account balance will be treated as determined in a reasonable manner if it is the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution."
Reading it again, § 1.401(a)(9)-5. 8 is for calculating the RMD method for SEPP payments - I would be using amortization, so you're right that it doesn't apply in my case.
But your other point about modifying the SEPP isn't applicable because the SEPP hasn't started yet. The SEPP balance isn't determined by what day you start the 72T, you can choose any date between 12/31 of the prior year and the date of initiation.
The reason I started this rabbit hole is, what if I have a high balance on 1/3/22 but then I split the account in two, before initiating the SEPP. Am I simply unable to use that high balance at all anymore? Or can I decrease it by the amount that was transferred out of the account? Or can I still use that full 1/3/22 balance despite the withdrawal?
I haven't seen any guidance from the IRS on this.
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