Rule 72(t) & Multiple IRAs: Can I Use Multiple IRAs in a SEPP Plan?

By Robert Townend, CPA | Early Retirement Access

For people considering an early IRA withdrawal before age 59½, a Rule 72(t) substantially equal periodic payment plan, commonly called a 72(t) SEPP, can provide an important exception to the 10% additional tax on premature distributions.

One question comes up frequently when we help clients design these plans:

Can I use multiple IRAs in a 72(t) SEPP strategy?

The answer is yes, but with an important qualification.

Under current IRS guidance, each SEPP is established using a single retirement account. If you have multiple IRAs, you can establish a separate SEPP for each IRA you want to use. Those SEPPs must then be calculated, documented, and maintained independently.

That leads to a more useful planning question:

How should I structure my IRA accounts before beginning a 72(t) SEPP?

The way you divide, or don't divide, your IRA assets before taking the first distribution can significantly affect your flexibility, liquidity, tax planning opportunities, and exposure to penalties for years to come.

A 72(t) SEPP Is Established for a Specific IRA Account

One of the most important concepts in SEPP planning is that a SEPP is account-specific.

Under current IRS guidance, you cannot simply combine the balances of several IRAs and calculate one SEPP distribution from the combined amount. Instead, each IRA used for a SEPP has its own calculation and its own substantially equal periodic payment schedule.

For example, assume a 52-year-old wants approximately $25,000 per year of supplemental retirement income.

Using the fixed amortization method, the IRS Single Life Table, and an assumed 5% interest rate, an IRA balance of approximately $406,206 would generate an annual SEPP distribution of approximately $25,000. You can calculate your own distribution metrics with our 72(t) calculator. 

That doesn't necessarily mean the taxpayer's entire IRA balance should be placed into the SEPP.

Suppose the taxpayer has $600,000 in an existing IRA. Structuring the entire $600,000 IRA as a SEPP account could unnecessarily restrict assets that are not needed to generate the desired $25,000 annual distribution.

A better planning approach may be to divide the IRA before the SEPP begins, placing approximately $406,206 into the IRA that will fund the SEPP while leaving the remaining assets in a separate IRA outside the SEPP.

That distinction can be extremely valuable.

Understanding the “SEPP Umbrella”

I use the term “SEPP umbrella” as a planning concept. It is not a defined term in the Internal Revenue Code.

Think of the SEPP umbrella as the group of IRA accounts a taxpayer has intentionally dedicated to 72(t) distributions.

For example, a taxpayer might have:

• IRA #1: subject to a 72(t) SEPP
• IRA #2: subject to a separate 72(t) SEPP
• IRA #3: outside the SEPP structure entirely

IRA accounts # 1 and # 2 inside the SEPP umbrella provide the taxpayer's planned penalty-exempt distributions.

The IRA outside the umbrella remains available for other planning opportunities, such as future Roth conversions, investment changes, or additional withdrawals if unexpected liquidity is needed.

This type of structure can be particularly valuable for someone whose goal is an IRA distribution with no penalty under the 72(t) exception while still preserving flexibility over the remainder of their retirement assets.

IRA Account Segmentation & Aggregation Strategies

Account structure is one of the most important parts of SEPP planning.

Before the first SEPP distribution, IRA assets can be consolidated or divided among different accounts to create the desired structure.

Once a SEPP begins, however, the account becomes significantly more restrictive. Generally, assets cannot be added to the SEPP account, portions of the account cannot be transferred to another retirement plan, and distributions outside the established SEPP schedule can create a prohibited modification.

For that reason, account segmentation should be completed before the first SEPP distribution is taken.

Here are four reasons why a taxpayer should consider account segmentation and aggregation:.

1. Reduce the Potential Damage From an Unexpected Future SEPP Modification

Suppose a taxpayer needs a $25,000 annual SEPP distribution and has determined that approximately $406,206 needs to be dedicated to the strategy.

One option is to place the entire $406,206 into a single SEPP IRA.

Another option might be to establish two equal IRAs of approximately $203,103 each and establish a separate SEPP on each account. Each SEPP would generate approximately $12,500 annually, producing the same total $25,000 of annual income.

Why would someone want two SEPPs instead of one?

Risk management.

A SEPP generally must continue until the later of:

• five years from the date of the first payment, or
• age 59½.

If a taxpayer improperly modifies a SEPP before that date, the IRS can impose a recapture of the 10% additional tax that had previously been avoided on distributions from that SEPP, potentially along with interest.

With two independently maintained SEPP accounts, a future problem affecting one SEPP does not necessarily mean the second SEPP must also be modified. An example might be a medical emergency involving a loved one that requires you to access funds during the life of your SEPP. 

In other words, segmentation can reduce the amount of retirement assets and prior distributions exposed to a potential SEPP modification.

2. Preserve Access to IRA Assets Outside the SEPP

Consider again the taxpayer with a $600,000 IRA who only needs enough assets to support a $25,000 annual SEPP distribution.

Instead of placing the entire $600,000 into one SEPP IRA, the taxpayer might divide the assets before starting the plan:

SEPP IRA(s): approximately $406,206
Non-SEPP IRA: approximately $193,794

The $193,794 IRA outside the SEPP can provide considerable planning flexibility.

If the taxpayer later needs additional money, withdrawing from the non-SEPP IRA would not disturb the SEPP account itself.

A taxpayer younger than 59½ may still owe the 10% additional tax on an IRA premature withdrawal from that separate account. However, the tax would apply only to the taxable amount actually withdrawn unless another exception applies.

And there are numerous IRA early withdrawal exceptions in the Internal Revenue Code. Depending on the circumstances, an IRA owner may qualify for an exception involving certain medical expenses, health insurance premiums while unemployed, qualified higher-education expenses, first-time homebuyer expenses, certain emergency personal expenses, disability, or another statutory exception.

Keeping some assets outside the SEPP therefore provides an additional layer of flexibility if circumstances change.

3. Preserve Other Tax-Planning Opportunities

A 72(t) SEPP is fundamentally a tax and cash-flow strategy.

It allows someone who has accumulated significant tax-deferred retirement savings to begin moving money from a traditional retirement account into taxable cash flow before age 59½ without triggering the normal 10% additional tax, assuming all SEPP requirements are satisfied.

This can be particularly attractive during early retirement.

Many early retirees experience a period of relatively low taxable income between leaving the workforce and beginning Social Security, pensions, or required minimum distributions. Those years can provide valuable tax-planning opportunities.

For example, assets held in an IRA outside the SEPP may potentially be used for Roth conversions during lower-income years.

That can allow a taxpayer to pursue two strategies simultaneously:

• use a 72(t) SEPP to generate current retirement income, and
• convert additional traditional IRA assets to Roth when tax rates are favorable.

If every retirement dollar is unnecessarily placed into SEPP accounts, some of that flexibility can be lost.

4. Simplify SEPP Distributions and Reduce Operational Errors

This may be the least glamorous reason for account segmentation, but in practice it can be one of the most important.

SEPP mistakes are often operational mistakes.

If a taxpayer establishes several SEPP accounts with different balances and different annual distribution amounts, it becomes easier to accidentally:

• withdraw the wrong amount,
• take a distribution from the wrong IRA,
• duplicate a distribution,
• miss a scheduled payment, or
• otherwise create a potential SEPP modification.

One way to reduce that risk is to establish multiple SEPP IRAs using identical starting balances.

For example, instead of creating:

• SEPP IRA #1: $250,000
• SEPP IRA #2: $156,206

a taxpayer might establish:

• SEPP IRA #1: $203,103
• SEPP IRA #2: $203,103

Assuming the same calculation assumptions are used for both accounts, each account would have the same annual distribution.

That makes administration considerably easier and reduces the chance of taking the wrong amount from the wrong account.

When a SEPP may need to operate for five, seven, or even ten years, simplicity has real value.

Can a 72(t) SEPP Provide an IRA Distribution With No Penalty?

Yes. More precisely, a properly structured 72(t) SEPP can qualify an otherwise early taxable IRA distribution for an exception to the 10% additional tax that normally applies before age 59½.

The distribution itself is still subject to ordinary income tax if it comes from a traditional pre-tax IRA. All distributions from IRAs and other deferred accounts will be subject to income tax.

So when people search for an IRA distribution no penalty strategy, it is important to distinguish between:

Income tax: generally still due on taxable traditional IRA distributions.

10% additional tax: may be avoided when the distribution qualifies under Rule 72(t) or another applicable exception.

Rule 72(t) is therefore not a way to make IRA distributions tax-free. It is a way to potentially make an early IRA withdrawal without the additional 10% tax.

Multiple IRAs Can Make a 72(t) Strategy More Flexible

Using multiple IRA accounts can be one of the most effective ways to build flexibility into a 72(t) SEPP strategy.

The objective should not simply be to maximize the amount placed into a SEPP.

Instead, good SEPP planning asks:

How much money needs to be inside the SEPP, and how much should remain outside it?

Strategically separating IRA assets before distributions begin can:

• preserve liquidity,
• reduce the potential consequences of a future SEPP modification,
• create additional Roth-conversion opportunities,
• provide access to other IRA early withdrawal exceptions, and
• simplify annual SEPP administration.

Not every 72(t) plan needs multiple IRA accounts. But deciding whether to consolidate, divide, or leave IRA accounts outside the SEPP should be part of the planning process before the first distribution occurs.

Once a SEPP begins, your options become much more limited.

For someone contemplating an early IRA withdrawal, spending time on account structure with a 72(t) expert before taking that first distribution can be just as important as calculating the distribution itself. Schedule a meeting with us today!