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72T Uniform Withdrawals

yogibearbullyogibearbull
in Other Investing
72T uniform withdrawals allow PENALTY-FREE (but TAXABLE) withdrawals from retirement accounts (IRA, 401k, 403b) before the age of 59.5. However, the rules are COMPLEX to prevent excessive withdrawals & are very RIGID – once started, there couldn’t be any changes & the program must continue for 5 years or to age 59.5, whichever the later (even if there is risk of running out of money, triggering premature termination penalties). A less noted provision of the new SECURE 2.0 allows some flexibility for 72T in making partial transfers and rollovers after 12/31/23.
https://ybbpersonalfinance.proboards.com/thread/249/uniform-withdrawals-retirement-accounts-72t?page=1&scrollTo=964

Comments

  • beebee
    edited March 2023
    I believe there are other IRA penalty free withdrawal provisions worth considering before considering a 72T withdrawal.
    You can withdraw funds from your 457(b) plan penalty-free at any age once you leave your employer or retire. You won't owe an early withdrawal penalty even if you are not yet 59 ½, but you will pay federal and state income taxes on the withdrawal.
    what-are-the-rules-for-withdrawing-from-a-457b

    also,
    What Is the Rule of 55?

    Under the terms of this rule, you can withdraw funds from your current job’s 401(k) or 403(b) plan with no 10% tax penalty if you leave that job in or after the year you turn 55. (Qualified public safety workers can start even earlier, at 50.) It doesn’t matter whether you were laid off, fired, or just quit.

    This rule applies to current – not former – 401(k) or 403(b) plans. The government does not permit penalty-free withdrawals before 59.5 from plans you had with a previous employer. If you want access to that money under the rule of 55, you would have to transfer those funds into your current 401(k) or 403(b) plan.

    You won’t have to pay the penalty if you take distributions from a 401(k) early for these reasons:
    - You become totally and permanently disabled.
    -You pass away and your beneficiary or estate is withdrawing money from the plan.
    -You’re taking distributions to pay deductible medical expenses that exceed 7.5% of your adjusted gross income.
    -Distributions are the result of an IRS levy.
    -You’re receiving qualified reservist distributions.
    401k-403b-55-rule
  • beebee
    edited March 2023
    Interestingly, the Cares Act and the Secure Act 2.0 have withdrawal provisions that were and are worth keeping in mind. With the Cares Act we borrowed and returned retirement money over the three year reporting window.

    I believe with the Secure Act 2.0 anyone can (withdraw and return) $1K (over a 3 year reporting period) from your qualified accounts penalty free for a "self certified emergency", $22K if one experiences a federal emergency, and unlimited penalty free withdrawals for a terminally illness (wow).

    first-look-at-the-secure-2-0-act
  • yogibearbullyogibearbull
    edited March 2023
    @bee, excellent points.

    I have been tracking implications of the new Secure 2.0 for individuals and there are several. This about 72T came to my attention only recently.

    The Rule of 55 is also good but, as you noted, it doesn't apply to old 401k/403b. So, one must leave work in the 55-59.5 time window. I have participated in discussions elsewhere about some people hanging on to their old 401k/403b for the benefit of Rule of 55, just in case, but it isn't applicable if one left work before 55.

    The best thing to do is to avoid tapping IRAs as much as possible. But people should be familiar with these early withdrawal tricks without the 10% penalty.
  • msf
    Being able to do a partial transfer/rollover of an account with 72(t) distribtutions is nice, but it begs the question why would one want to do that? The usual advice, especially with respect to (employer-sponsored) retirement plans is to do full rollovers.

    Jeffrey Levine (Kitches.com) has a nice discussion of many of the SECURE 2.0 Act provisions. He offers a good example of why one might want to do a partial transfer. In short, because there might be an investment opportunity that would lock up the money (e.g. CD). To take advantage of that opportunity while still being able to make the requisite distributions, one retains some of the money in the original account for withdrawals. See Example #5.

    https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/

    I am a bit confused by the recommendation on Yogi's page. "IRA owners and plan participants should keep 72(t) account balances segregated from other amounts."

    ISTM 72(t) accounts must be segregated. 72(t) withdrawal amounts are based on the entire balance of the account being used. And you're not allowed to add money to the account once the withdrawals commence. That appears to originate with RR 2002-62 Section 2.02(e). So there's no commingling at the start of withdrawals, and no commingling after that.

    Thus keeping 72(t) account balances segregated seems to be a requirement, not a recommendation. And this has little to do with SECURE 2.0. Prior to that Act, one could not do a full transfer into an existing IRA with a nonzero balance. 2.0 allows partial transfers, but the restriction appears to remain intact - one cannot do a transfer, partial or full, into an existing IRA.

    The only effect that 2.0 seems to have on distributions is that while the total amount of the 72(t) distribution must be based on the combined balances of the split account, one is free to make the exact requisite withdrawal amount from any combination of the 72(t) accounts (that resulted from the split). In this respect, the 72(t) calculation and execution is like an RMD calculation and execution done across multiple accounts.
  • yogibearbullyogibearbull
    @msf, I have put that text under quotes now (it was implied before). It is from the M* article by Denise Appleby (@ApplebyIRA at Twitter, LINK). I acknowledged on Twitter that her's was the first time that I saw this about 72T. It wasn't in any of the links from Kitces or the good links that you had provided on MFO.
  • msf
    Whether it is your statement or hers, it still leaves me confused. When segregating 72(t) balances from other balances is offered as a merely a recommendation, the inference is that with care one could combine balances without seeing retroactive 10% taxes. It speaks of "help" in preserving the plan and "risk" of breaking rules, not of certainty.

    My understanding is that any altering of balances (which would appear to include commingling) automatically breaks the rules. That goes beyond "risk" all the way to certainty. What am I missing? How could one not segregate balances without breaking the rules?

    Again, none of this seems specific to SECURE 2.0. Once you're allowed to transfer 72(t) account assets, even if restricted to full transfers, the issue of transferring assets to an existing IRA (commingling assets) arises. And if you've got two accounts taking series of SEPPs, the question of commingling balances in either of them is the same regardless of how those SEPPs were set up. You could have set up a different series of SEPPs on each account independently (even before 2.0), or as a single series of SEPPs on one account that was then split (post-2.0)).

    The ability to split accounts doesn't seem to create any new commingling issues.

  • yogibearbullyogibearbull
    @msf comments made me look at other sources for the 72T-SEPP modification. Ed Slott's IRA Help has a slightly different take on it. It says that previously, the entire IRA under 72T-SEPP had to be rolled over (say, to a different IRA provider/sponsor) but there couldn't be any other changes (in withdrawal amounts, or any additions/subtractions). But now, with Secure 2.0, the IRA under SEPP can be split, say, into 2 IRAs but the total withdrawal amount from both must be the same as the previous withdrawal amount. This is much more restrictive that what Denise Appleby’s M* article implies.
    https://www.irahelp.com/forum-post/74422-new-sepp-rules

    I suggest that @msf follow up on this with M* or @ApplebyIRA at Twitter.
  • beebee
    Ed Slott has a very helpful discussion forum for all kinds of "taxy"... "IRSy"..."investy" things:

    If you would like to post a question/answer you need to log in.

    https://irahelp.com/forums/ira-discussion-forum

  • msf
    edited March 2023
    I suggest that @msf follow up on this with M* or @ApplebyIRA at Twitter.

    I'm rather antisocial (media) - no Facebook, Twitter, etc. accounts. And M* keeps making it harder to communicate with. Instead I'll try D. Appleby's website targeted at individuals, and relay what response I get.

    About the website: https://retirementdictionary.com/about-us/

    "The rules that govern IRAs, 401(k)s and other retirement accounts are complex. Need a plain-English explanation? Ask us!"
    https://retirementdictionary.com/ask-an-expert/
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