10 Key Rules for Mastering the SEPP/72(t) Exception to the 10% Early Distribution Penalty for IRAs and Employer Plans FLEXCAST

Overview

One of the challenges faced by advisors is to help their clients minimize income tax on their retirement savings. This includes avoiding the 10% additional tax (early distribution penalty) penalty when possible. According to a 2019 GAO report: individuals in their prime working years (ages 25 to 55) removed at least $69 billion (+/- $3.5 billion) of their retirement savings early IRA withdrawals were the largest source of early withdrawals of retirement savings, accounting for an estimated $39.5 billion of the total $68.7 billion… Distributions taken by these individuals are subject to a 10% early distribution penalty unless they qualify for an exception. One of the exceptions is distributions taken under a substantially equal periodic Payment (SEPP) program, commonly referred to as a SEPP/72(t) payment because they are governed by Internal Revenue Code Section 72(t). The rules for 72(t) programs have been updated under IRS Notice 2022-6, which is effective for any 72(t) payments commencing on or after January 1, 2023 and may be used for 72(t) payments commencing in 2022. Changes were also made under SECURE Act 2.0 While a 72(t) program can help the owner of an IRA or employer-plan account avoid the 10% early distribution penalty, only ‘suitable’ individuals should enter such an arrangement.

Highlights

Key factors for determining if an individual is a good candidate for a 72(t)payment program. Strategies for calculating 72(t) payment amounts. How to avoid transactions that could result in a modification. The exception that allows switching of the 72(t) calculation method. The exception that allows a 72(t)-payment program to be discontinued.

Prerequisites

None.

Designed For

CPAs and tax professionals.

Objectives

When the 10% early distribution penalty applies to distributions; How to identify suitable candidates for the 72(t)-payment program; and The compliance requirements for a 72(t)-payment program.

Preparation

None.

Notice

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