72t Substantially Equal Periodic Payments early IRA distributions

[e2020donna]

On 7/1/23 began a 72t SEPP plan from my IRA. (I'm 58 1/2), but the advisors at the financial institution where the IRA is held tell me they can't answer any questions about the plan and I should ask a tax advisor. 🙂 So here's my question: I'm using the RMD Universal Life table. I understand that with the RMD method, the distribution amount will change each year according to the account balance on 12/31 of the previous year, but how does that change occur? Is it automatic somehow or do I need to fill out a new distribution form with the new calculation each year? Assuming it's on me, can I file the form at any time before July 1 each year?

[dmertz]

The IRA custodian would have to answer these questions.  If they will be making automatic distributions, they would have to know that and would have to know how they determine the amount to distribute, and you would have to have given them permission to make these automatic distributions.  If they aren't making automatic distributions, you would have to request a specific amount to be distributed each year.

[marctu · Accepted solution]

So just for transparency lets first discuss why one would do this.  So in general, Under Section 72(t), there is an additional tax of 10% on distributions to the taxpayer if the distribution is made before the taxpayer is age 59 ½.

You are using the exception to the 10% exception to the 10)% additional tax, which allows under  Section 72(t)(2)(A)(iv), if the distributions are determined as a series of substantially equal periodic payments (called a “SoSEPP”) over the taxpayer’s life expectancy (or over the life expectancies of the taxpayer and the taxpayer’s designated beneficiary), the 10% additional tax does not apply.  There are a number of requirements that can be found here:  https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments

Also there ae three methods under which the taxpayer may use in determining payments under the SoSEPP , and you choose number one.  They are:  

• the required minimum distribution method (the “RMD method”),
• the fixed amortization method, and
• the fixed annuitization method.

So focusing on the RMD method, which you choose there are also a number of choices that can be made here.  You choose the Uniform Life Table, and I am assuming the Single Life Table.  You could also choose the Single Life Table and the Joint and Last Survivor Table.  

So Under the RMD method, a payment under a SoSEPP is determined by dividing the account balance by a life expectancy determined under Q&A 5 above, using attained age(s) in the calendar year of the distribution. A new annual amount is determined in this manner each year.  So this is going to be on you.  If you are taking a lump sum each year, which I am assuming is the basis of the date, as long as you inform the custodian before their deadline you should be fine.  If you did it in year one you already know how to do it.