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The following statement was posted on the Foolish Workshop board. It was not related to the post, so I thought I would post it here to find out what exactly this means. Can someone please comment on "the rules" mentioned in this statement? TIA for the reply.

ryknow

BTW, if you're fortunate enough to reach the point of retirement in less than 20 years you can still withdraw money from your IRA without penalty by using the rules for "substantially equal withdrawals based on your life expectancy".
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The law allows SEPP also called 72(t) distributions (and in IRS publications annuity distributions) to begin without penalty prior to age 59-1/2. The allowed payments are intended to last for your life expectancy. Therefore, if you are young, they will be small--perhaps as little as 2% of the account balance per year.

The payments may be calculated three different ways--which gives some flexibility in size of payments--but still intended to last your full life expectancy. Your plan custodian will usually be willing to calculate the estimated distributions in your case.

The main requirement of SEPP distributions is that once begun they must continue for the longer of 5 years or until you reach age 59-1/2. If for any reason you fail to make a distribution in a given year, you will be assessed penalties on all previous distributions under the plan. The great concern is that the underlying account may not earn sufficient assets to allow distributions for all the years required. Therefore, SEPP distributions are best suited to those close to retirement or must necessicarily be conservative.

The IRS Publication on IRAs (Is it Publication 590?) has a section on SEPP distributions and gives an overview of the rules. That is a good place to begin for more information. You will also find books on IRAs in your local library or book store. Most of them have chapters on SEPP distributions.
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The law allows SEPP also called 72(t) distributions (and in IRS publications annuity distributions) to begin without penalty prior to age 59-1/2.

Actually, it is IRC §72(t)92)(A)(iv).

The allowed payments are intended to last for your life expectancy. Therefore, if you are young, they will be small--perhaps as little as 2% of the account balance per year.

I am uncertain. I have never read an authoritative publication that suggests that SEPPs are really supposed to last for one's lifetime. However, the methodologies suggested in Notice 89-25 would lead one to that conclusion.


The payments may be calculated three different ways--which gives some flexibility in size of payments--but still intended to last your full life expectancy.

True.

Your plan custodian will usually be willing to calculate the estimated distributions in your case.

Usually not true.


The main requirement of SEPP distributions is that once begun they must continue for the longer of 5 years or until you reach age 59-1/2.

True.

If for any reason you fail to make a distribution in a given year, you will be assessed penalties on all previous distributions under the plan.

Partially true. Let's mot forget statutory interest for all of the intervening time periods.

The great concern is that the underlying account may not earn sufficient assets to allow distributions for all the years required.

Not true. There are a variety a devices available to help; if not eliminate, pre-mature "account exhaustion".


Therefore, SEPP distributions are best suited to those close to retirement or must necessicarily be conservative.

Again, not true.

The IRS Publication on IRAs (Is it Publication 590?) has a section on SEPP distributions and gives an overview of the rules. That is a good place to begin for more information. You will also find books on IRAs in your local library or book store. Most of them have chapters on SEPP distributions.

Actually, the most untrue of all. 99% of all publications on the shelf at any bookstore you might choose to visit have no information on §72(t) distributions (actually a blessing in disguise). Those that do are more misleading in that they are 80% to 90% flat-out WRONG.

IMHO, one should visit www.soapbox.com and go shopping.

TheBadger
(Who has had one too many and is on a rant)
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pauleckler writes,

The main requirement of SEPP distributions is that once begun they must continue for the longer of 5 years or until you reach age 59-1/2. If for any reason you fail to make a distribution in a given year, you will be assessed penalties on all previous distributions under the plan. The great concern is that the underlying account may not earn sufficient assets to allow distributions for all the years required. Therefore, SEPP distributions are best suited to those close to retirement or must necessicarily be conservative.

For more on IRA account exhaustion during SEPP distributions, see the following link:

http://www.geocities.com/WallStreet/8257/safesepp.html

intercst

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TheBadget and intercst are the two resident gurus of the Retire Early board. So if you really want to know about SEPP withdrawals, you should (1) consult intercst's Web page, referenced in his post, (2) visit soapbox.com and buy TheBadger's report, lauded by all who have done so and/or (3) frequent the Retire Early Homepage board, master source of all SEPP arcana and other issues related to early utilization of retirement accounts.

EditorialWe
not ashamed to plug on others' behalf
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EditorialWe:

First and foremost --- thanks for the plug.

Second --- many folk on the Retire Early Home Page and elsewhere have a lot of good ideas & opinions on the sociological, finacial & tax persepctives of retiring early.

Second to last, I would caution your readers in only one regard --- as it relates to the sociological issues of retirement or the financial / investment issues surrounding retirement; there are multiple perspectives and multiple right (as well as wrong) answers. Further, one needs to sift through these perspectives; not so much from a right versus wrong perspective; but from a perspective of which of the competing viewpoints FIT with one's own peculiar set of circumstances.

Lastly, not unlike the presidential election just concluded, there is only one right answer as it relates to tax issues. However, the one right answer is not always obvious and sometimes requires a court (trier of fact or superior) to determine what that right answer is.

TheBadger

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