At times, investors want to tap their retirement accounts early. It could be they see a great balance and want to retire early. It could be because extraneous circumstances prevent them from working, or perhaps, life just throws them a curve ball and they need the money.

Investors may look into 401(k) loans, hardship withdrawals, or the list of exceptions to the 10% early withdrawal penalty. Inevitably some investors stumble upon Rule 72(t), Substantially Equal Periodic Payments, and think this is the answer. First, I rarely ever recommend tapping a retirement account early — retirement funds should be considered a last resort. Second, Substantially Equal Periodic Payments plans are very circumstantial. While I often say, “this plan isn’t suitable for every investor,” SEPP arrangements require a very specific set of variables to work for an investor’s situation.

SEPP arrangements allow an investor to take payments from a qualified retirement account at any age. The stipulation is that the payments must continue for the longer of five payment years from the first distribution or until you reach age 59 ½. While this method bypasses the early withdrawal penalty, the withdrawals are taxed at your current income tax rate. The primary drawback to using Rule 72(t) is that you may deplete your retirement accounts well before the end of your life expectancy.

Among the many other drawbacks are that most payments do not change, so inflation will decrease your purchasing power and you cannot recontribute the money to a retirement plan if you find you do not need it. I most often view a Rule 72(t) arrangement as a last resort.

The IRS has three approved methods for calculating SEPP withdrawals: amortization method, annuity factor method or the required minimum distribution method. Both the amortization and annuitization methods result in withdrawals that remain level from year to year, while the RMD method is recalculated annually, increasing the required distribution amount. Furthermore, any change to the IRA balance that is not a result of regular gains and losses will be considered a modification of the plan and will trigger a 10% early withdrawal penalty that is retroactive to the first SEPP withdrawal. Depending on when the first withdrawal occurred and when the modification happened, this could be a substantial penalty that negates the whole process.

However, there is one exception — IRS Rule 2002-62 allows for a one-time irrevocable switch from the amortization or annuitization methods to the RMD method. This switch might allow an investor to keep more assets in the IRA by decreasing the withdrawal amount, but the investor is still left with a set of important variables that he or she likely cannot control. For example, a change in health may cause an investor to decrease working hours or inflation may increase resulting in a tighter cash flow.

Overall, if you find yourself in a situation where a SEPP arrangement may be your best option, I highly recommended that you look at the SEPP in context of your overall financial plan. Consider having a financial adviser project how the withdrawals might affect your assets as well as how other variables like taxes, market performance, and other retirement accounts may affect the outcome. As a financial expert, I never want to see an investor use their retirement funds earlier than necessary.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

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