Updated guidance for 72(t) plans

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Gryphon
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Joined: Sat May 07, 2016 11:43 am
Location: Missouri

Updated guidance for 72(t) plans

Post by Gryphon »

Per this thread over on 72tnet.com, the IRS is about to publish its updated guidance for SEPP plans. A couple things that stand out:

The new rules are optional for plans starting this year & mandatory for plans starting next year. Section 4:
The guidance in this notice replaces the guidance in Rev. Rul. 2002-62 and Notice 2004-15 for any series of payments commencing on or after January 1, 2023, and it may be used for a series of payments commencing in 2022. In the case of a series of payments commencing in a year prior to 2023 using the required minimum distribution method, if the payments in the series are calculated by substituting the Single Life Table, the Joint and Last Survivor Table, or the Uniform Lifetime Table described in section 3.02(a) of this notice for the corresponding table that was used under Rev. Rul. 2002-62, then the substitution will not be treated as a modification within the meaning of section 72(t)(4) or section 72(q)(3).
I'd take this to mean that existing plans that started prior to 2022 are not affected, except that plans using the RMD method can switch to the new life expectancy tables. (This is the part I'd been waiting for.)

New plans using the annuitization & amortization methods can apparently use an interest rate of up to 5% if the 120% federal mid-term rate is less than 5%. Section 3.02(c):
The interest rate that may be used to apply the fixed amortization method or the fixed annuitization method is any interest rate that is not more than the greater of (i) 5% or (ii) 120% of the federal mid-term rate (determined in accordance with section 1274(d) for either of the two months immediately preceding the month in which the distribution begins).
EddyB
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Joined: Fri May 24, 2013 3:43 pm

Re: Updated guidance for 72(t) plans

Post by EddyB »

Thanks for posting. Maybe rates will rise enough that it won’t make much difference, but compared to recent rates, that would be a real change in ability to draw down for early retirees looking to avoid spread out withdrawals to avoid later large RMDs.
6NDone
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Re: Updated guidance for 72(t) plans

Post by 6NDone »

That is a game changer for me. I plan to take retire early and take SEPP withdrawals in about 5-6 years (hence my name), and this would allow me to take a much larger withdrawal from my rollover IRA and not be reliant on my taxable account.
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Alan S.
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Re: Updated guidance for 72(t) plans

Post by Alan S. »

This is interesting, and thanks for providing the links.

After several years of rock bottom interest rates that are now on the verge of significant increases, NOW the IRS introduces 5% as a minimum interest rate! :oops:

Of course, those adopting a 72t plan should not have been using the RMD method in the first place because even with the low interest rates of recent years, either of the fixed dollar methods of calculation still generated a higher annual distribution than the RMD method did even when the single life table was used.

With 2002-62 now being updated with the 5% rate at the same time that new RMD tables become effective that reduce distributions for most, the advantage that the fixed dollar methods have enjoyed all along is being increased considerably. Use of the RMD method all along has added risk to 72t plans because:

1) You must apply a higher balance of your IRA to generate the same dollar distribution when using the RMD method. That leaves a lower balance left for an IRA account outside the plan for emergency needs or starting a second 72t plan, and this other IRA account essentially provide insurance against busting the plan if the taxpayer needs more money than the plan generates.
2) With the RMD method you must complete a new calculation every year, updating your age and the account balance (but cannot change RMD tables). Instead of a single calculation for a plan lasting 8 years, you now have 8 annual calculations which means more chances of making an error and busting the plan.
3) With a fixed dollar method, you have the option of a one time switch to the RMD method, which is most often used to reduce annual distributions and preserve IRA tax deferral. If you start with the RMD method, there is no option to reduce it, nor is there an option to increase it, unless your investment gains are enough to provide an increase.
4) With the RMD method a major market loss can cause a major reduction in the annual distribution. This is particularly costly when inflation is spiking and you need more to pay expenses, not less.
drg02b
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Re: Updated guidance for 72(t) plans

Post by drg02b »

I saw the mysterious references to "forthcoming guidance" on 72t distributions last fall. So excited about the 5% option as 72t is definitely in my early retirement plans.
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