What Are 72(t) SEPPs?
How Can 72(t) SEPPs Help Meet My Financial Goals?
72(t) SEPPs allow immediate use of up to 6% of your deferred retirement funds (401Ks, IRAs, 403(b)s) annually, penalty free before reaching age 59 ½.
You may set up a 72(t) SEPP at any age before 59 ½ to avoid the 10% early withdrawal penalty. Payments must continue each year for the longer of 5 years or until you reach age 59 ½.
Substantially Equal Periodic Payments (SEPPs) are similar to annuities, and are relatively “no strings attached” with respect to your usage of funds.
Once put in place, a SEPP cannot be revoked without penalties – they are a one-way street. With proper planning, SEPPs can be designed with the flexibility to increase or decrease future payments if necessary.
72(t) SEPPs work effectively as both a cash flow source and a wealth planning tool to avoid RMDs by moving money from tax-deferred accounts into a Roth IRA.
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Frequently Asked Questions about 72(t) SEPP plans.
We believe it is unlikely a SEPP would fully deplete your retirement funds, more likely a SEPP simply slows the rate of growth in your deferred retirement account. For example, if you had $500k in a 401K and started a SEPP to supplement your income at age 50. Assuming normal market returns, and an annual SEPP distribution of $30,000, in 10 years, your deferred retirement account would have a balance of $823k. Note the 4-5% generally agreed on “safe withdrawal rate” is typically calculated over a 30 year period, which generally doesn’t apply to your SEPP withdrawals.
SEPP payments are reported on a 1099-R by your trustee/custodian and taxed as income. SEPP payments can be advantageous in a few ways: (1) Receiving payments while in a lower income bracket may make sense if you’ll be facing higher income brackets in the future, particularly those associated with Required Minimum Distributions (RMDs) in retirement. (2) State-specific tax advantages: Certain states offer exclusions, credits, or provide other tax-advantaged treatment of retirement account distributions. (3) Exemption from FICA/Medicare taxes: SEPP payments are not subject to FICA/Medicare taxes, which are typically charged on earnings from self-employment.
Early retirement planning starts with budgeting effectively, and making good strategic investment decisions. Since the nature of 72(t) SEPPs locks in a payment for an extended period of time, (the longer of 5 years or until you reach 59 ½.) it's important to proactively use SEPP planning to mitigate risks the fixed nature of 72(t)s create. For example, a one-time switch in methods to the RMD method can reduce your annual distribution by over 60%. It’s also possible to increase SEPP distributions depending on how deferred accounts are utilized in the 72(t) set-up process.
We’re not aware of any evidence that points to SEPPs flagging clients for audits. That said modifications to payments once started could indeed lead to inquiries by the IRS, and potential problems for the unprepared. In cases where you are audited you will 100% be asked to support your SEPP payments..
This is a great reason to consider using a CPA to ensure you have the necessary documentation to satisfy an initial request by the IRS. In short, be prepared to support your payments with documentation, and sufficient documentation to support every input into your SEPP calculation. You should also have the tax forms to support all your SEPP distributions.
This is a complex area involving the use of SEPPs to move funds from tax deferred accounts into tax exempt accounts. One benefit of this strategy is the mitigation of RMDs in your retirement years. Using a SEPP to accomplish this gives you more flexibility in the use of your funds.
This is one of the most common questions for anyone facing unplanned retirement or needing early access to a 401(k). If you are familiar with the FIRE movement (Financial Independence Retire Early), this is an often asked question. The IRS has set age 59½ as the standard threshold for penalty-free retirement withdrawals, but there are multiple exceptions outlined in IRC §72(t) that allow penalty-free 401(k) withdrawals from accounts like 401(k)s, IRAs, 403(b)s, and TSPs.
Currently, there are over 20 exceptions that allow you to withdrawal funds from a 401k or IRA — and that number continues to grow. Early withdrawal reasons range from turning 59½, adopting a child, being a first-time homebuyer, to facing a terminal illness. Many of these exceptions, however, may not be practical or desirable for most people. For those considering an early retirement plan, two of the most commonly used strategies to take withdrawals from a 401(k) without penalty are:
- Rule of 55: If you leave your employer in or after the year you turn 55, you may be able to make penalty-free 401(k) withdrawals from that employer’s plan. You need to check with your provider, but this is often the most straightforward and most flexible option, and you won't need to talk to a CPA
- 72(t) SEPP (Substantially Equal Periodic Payments): If the Rule of 55 isn’t available, a SEPP plan allows you to take no-penalty withdrawals from your 401(k) or IRA. SEPPs are more rigid, requiring consistent payments for at least five years or until age 59½, whichever is longer.
Of these two options, the Rule of 55 is generally the preferred method, but 72(t) SEPP withdrawals are also a proven strategy to provide immediate access to retirement funds if you don't qualify or can't pull out required funds using the Rule of 55.
If you’re exploring early withdrawals from a 401(k) or other deferred retirement plan, it’s wise to consult a 72(t) expert. A professional can help you determine the best strategy for your situation and avoid costly mistakes. Contact us for a free consultation to learn how to access your retirement assets with the peace of mind that it's being done correctly.
Whether a 72(t) plan makes sense after a job loss really depends on your individual circumstances. Losing your job — or facing an unplanned retirement — can be a good reason to tap into your retirement savings early. Fortunately, there are several ways to access your 401(k) or IRA before age 59½ without paying the 10% penalty. A 72(t) SEPP (Substantially Equal Periodic Payments) plan is one of those penalty-free 401(k) withdrawal options, but it’s important to understand how it works and when it’s appropriate. Under a 72(t) plan, you can take no-penalty withdrawals from your IRA or 401(k) by committing to a fixed series of payments calculated according to IRS rules. Once you start, these withdrawals must continue for at least five years or until you reach age 59½ — whichever is longer. This approach can serve as a structured early retirement plan for individuals who need a consistent income and don’t plan to return to work soon. However, it also limits flexibility — changing or stopping payments results in a retroactive 10% surcharge and potentially additional penalties and interest. Before choosing a 72(t) withdrawal, it’s smart to consider other ways to gain access to your 401(k) funds, such as the Rule of 55, paying the 10% penalty on a limited withdrawal, or a hardship withdrawal. Each method has its pros and cons. A 72(t) can provide a steady income and tax-efficient access to retirement funds, but it’s a complex strategy that should be customized to your goals and cash flow needs.
If you’re considering a withdrawal from a 401(k) due to job loss or early retirement, consulting with a 72(t) expert can help you understand your options and design a plan that balances flexibility with long-term security.
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