Booming stock markets. Job dissatisfaction. The explosion of 401(k)s since the 1980s. The itch to travel. The desire not to worry about Monday morning.
We may be on the threshold of an early retirement boom. Many potential early retirees will find the lion’s share of their financial assets are in a traditional 401(k) or traditional 401(k)s. The concern becomes the 10 percent early withdrawal penalty.
How can I access my retirement accounts prior to age 59 ½ without paying the 10 percent penalty?
Enter the 72(t) payment plan, sometimes called a series of substantially equal periodic payments or “SEPP.” In today’s environment, they are a very viable option for those looking to retire early primarily on traditional retirement accounts.
There is a drawback: impermissible modifications of a 72(t) payment plan trigger the previously avoided 10 percent penalty and related interest charges. This risks potentially paying the IRS thousands of dollars for a misstep.
What are the risks of a 72(t) payment plan?
I explore the risks of a 72(t) payment plan in this 38 page article titled What are the Risks of a 72(t) Payment Plan? I’m self-publishing it as an article since it is much more comprehensive than a blog post.
Of course, the article is not legal or tax advice for you or any other individual.
For those of you who read Tax Planning To and Through Early Retirement, which I recently published with Cody Garrett, CFP(R), please know the article is written differently. The book is very focused on planning covering a plethora of retirement tax planning topics, including planning for 72(t) payment plans. The article is much more akin to a “501” level discussion of the risks of a 72(t) payment plan and the ambiguities in the tax law surrounding 72(t) payment plans.
If you like this style of writing, I have another self-published article you may enjoy: Solo 401(k)s and the Rule of 55: Does the Answer in 1962?
Enjoy the article and please let me know what you think in the comments below.
FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com
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This post and the linked-to article are for entertainment and educational purposes only. They do not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.
Thanks for posting. I always enjoy reading articles on your website.
I liked the paper and found it very interesting how IRS did not clearly define the rules around 72t and found your proposal for Simple 72t to be a reasonable solution should they adopt it. I agree that allowing for 10% variation would make it a lot easier for us to manage a 72t.
Excellently written and great analysis, Sean! One of the best reads on 72(t) that I’ve read. I also appreciate the in depth research paper style. One item to put out there for Risk Mitigation… “Just do 5%”
It seems to me like the majority (but not all) of the scenarios in the paper deal with risk in identifying the percentage rate for the initial calculation. This could reduced by simply selecting 5% as the interest rate, as permitted by 2022-6(3)(2)(C). While this may not optimize the 72t IRA balance, it removes the risk of selecting the incorrect rate. Further, as I read it, as of the date of this comment, 120% of the February monthly Mid-Term rate is 4.54%, so as such the 5% guidance is actually favorable for new 72ts. Finally, while its speculative at best, some would argue that we are more likely in a rate reduction environment rather than a rate increase environment, which if true, would push more folks in to the 5% selection.
I’m modeling a DIY 72t for starting in 2027 at age 52.5 and I’m intending to use 5% to mitigate risk. I fully agree with the conclusions of the paper and the well stated theme that further clarification, simplification, following the process, and legal precedent should be established that makes the part of the tax code more concrete that we can plan around. Thanks again for your work in making FI a reality for me and other people out there!