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- Date of Birth: 1981
- Age: 40
- Married
- Annual cash needed year 1 (after taxes): 50,000
- Annual cash needed later years (after taxes): 50,000
- 72t Method: Amortization
- 72t Distribution Start Date: Not yet
- Life Table Used: Single
- Stub Year (Y/N): N
- Annual Recalc (Y/N): N
- AFR Rate: 1.07% or hopefully higher
- 72t Account Balance(s): $3.1M
- Describe other assets: SEP-IRA $700k, Roth $2.5M
I've done well in my retirement accounts but could really use some of that money now to supplement my current income and pay off debt. Hoping to be able to get $100k/year pre-tax if May interest rates go up. I understand I'll be paying a high tax rate if still working and will be committed for the next 20 years. The plan is to cut back on work in the next few years anyway, so the 72T payments will still be nice to have.
Is there anything I'm missing that would make this a bad idea? Would appreciate any feedback anyone might have.
You should use the 'REVERSE CALCULATOR" on this website to determine the MAXIMUM AMOUNT that you need to put into your separate SEPP 72-T account that will allow you to take $ 100,000 per year PRE-TAX, but I am confused why you think that will result in your being in a 0% tax bracket, since you said you wanted to have $ 50,000 after taxes. The highest tax rate now is 37% !!! Further, the Married Filing Joint tax rate is only 12%, so your figures need some fine tuning, and projections by an experienced tax professional or financial advisor (not a stock broker).
But conceptually you can make the figures work. By separating $ x,xxx,xxx into a SEPP 72-T account now to generate $ 60K, $ 75K, or $ 100K pre-tax. The balance of your $ 3,1 million IRA should be kept in a different IRA account for future emergencies, or to set up another SEPP 72-T in later years. By the way, ideally you should consider doing ROTH CONVERSIONS from your remaining IRA up to the limits of the 24% tax bracket if you have children, because ultimately the next generation (but not your wife) will be required to withdraw the ENTIRE IRA & SEP-IRA balances over no more than 10 years under the SECURE ACT which was passed in Dec 2019. This could happen at the height of their earning years, and would probably be taxed at 37% or higher, especially since these accounts will grow significantly over the years.
Because of the size of your estate, and age, and hopefully good health, you should consider whole life insurance to cover the income taxes that your children will have to pay on the retirement account distributions after you and your wife die.
Thank you for your thoughtful reply.
To clarify - right now, the calculator is telling me I can get $90k/year pre-tax on $3.1M at the 1.07% April AFR. So that $3.1M is actually already partitioned from the $700k SEP-IRA in order to get the $90k/year. Post-tax, I expect that to net about $45k/year - as both wife and I are still working in a high-tax state, we will definitely not be in the 0% bracket.
You might consider having the taxes either withheld at the SEPP 72-T level, and have the taxes remitted by the broker. You could also increase your withholdings at work to cover the taxes on the SEPP 72-T distributions. Third option is to file quarterly estimates.
You didn't indicate whether you were going to take distributions monthly, quarterly, semi-annually, or annually. This will affect which of the above methods you would use for remitting the income taxes during the year.
Annually. I was kind of hoping that half of my 2nd annual distribution could go to pay taxes on the 1st annual distribution, and then half of my 3rd annual distribution would pay the taxes on the 2nd, etc. I suppose that may subject me to penalties, though.
Do you recommend setting up a plan with a professional? My CPA was not knowledgeable and it seems fairly straightforward as long as I just stick to the amortization fixed annual withdrawal.
You are correct that you could be subject to penalties and interest. However, since the quarterly estimate dates are 4/15, 6/16, 9/15, and 1/15, your plan would work for the 1Q estimate if you took your 2nd distribution in early April, your 3rd distribution in July thru early Sept, and took your 4th one in Oct thru Dec. The only one that this wouldn't work for would be the 6/15 estimate payment. You might be able to use other funds for that payment, and "reimburse" it with the early July distribution.
you are also correct that the vast majority of CPAs and other tax professionals and financial advisors are clueless about SEPP 72-T mechanics and nuances. You appear to be way ahead of them already. Your plan seems to be well thought out, and you are probably ok to "go it alone" as long as you make sure to stick to it. You might want to put only $ 3 million into the SEPP 72-T account, and leave $ 100,000 in a separate IRA account "just in case you need it in the future". This would have a minimal effect on your annual distributions.
You didn't answer my question about children, or beneficiaries beyond your wife, and if you have considered life insurance to pay the income taxes that they will incur on the accelerated IRA distributions after you and your wife die.
Re: putting $100k in a separate account - that's what I did to end up with the $700k SEP-IRA, which would be my emergency fund.
Two children, ages 3 and 5. I am generally averse to whole life insurance based on what I have read. Particularly since I am cash poor now, I don't know that it makes sense to pay premiums out of pocket now for tax savings decades down the road. And maybe I will run out of money or the accelerated distribution laws will change by then.
But you've given me some things think about - thank you for being so generous with your time and knowledge.
I rarely recommend whole life insurance, because most clients need the most coverage for the least dollars. However, "wealthy" people should look at whole life insurance as a "tax free investment". At your age, the premium cost should be modest. You could look into one with a "5th Dividend Option" which is one which minimizes the out of pocket cost by borrowing against the "cash value" to buy paid up term insurance to repay the "loan". (I am familiar with this coverage because my father bought it for me in 1956 as one of the first insured in the country under this coverage when is was 18 years old.) Another type of coverage to consider is the new "hybrid" policies which combine whole life and long-term care into a single policy. For example, if you bought a policy for $ 1 million coverage, it would pay up to that amount of long-term care benefits during your lifetime, and when you died, it would pay the $ 1 million death benefit minus whatever amount, if any, that was used for long-term care benefits. Another possibility to consider would be a "2nd to die policy" that would pay the proceeds only upon the death of both of you, which would coordinate when the IRA accounts would have to start to be distributed over 10 years (because the spouse does not have this 10-year requirement).
As an aside, with my "financial planning hat" (as an Estate and tax planner, not as a PFP), I strongly suggest that you meet with your CPA and an Estate Planner to make sure that your affairs are up-to-date in accordance with the SECURE ACT. In addition, you should have your CPA work with you on establishing a BUDGET, because someone with your accumulated wealth, and both of you working in a "high tax state", something may need fixing in why you are "cash poor". Maybe you are "house poor" because of having too expensive a house or life-style. Maybe you paid off your mortgage, and should be using OPM by using the equity in your house to provide more TAX-FREE cash. Maybe you paid cash for cars, instead of financing them.
In addition, if you are "cash poor", you should be figuring out a way to fund your kids Education with 529 plans, which provide TAX-FREE income and growth for their college and post-graduate educations, unless you are planning to use the ROTH IRA for that purpose. You didn't indicate the extent of your combined annual income, and if you are funding 401-K/403-B retirement accounts to the maximum of $ 19,500 each, either with deductible or ROTH contributions, depending upon your tax situation, and your tax planning and investment philosophy between these alternative approaches.
As you might have guessed, I am a unique tax professional who is knowledgeable in all of these areas. Unfortunately, there are a limited number of professionals who have my breadth of expertise, but maybe you can find someone like me in your area. Even though your CPA may not be knowledgeable in SEPP 72-T, he might have expertise in these other areas, or can act as the "quarterback" putting together a "team of various professionals" that befits your financial situation, especially if you (and your wife) die prematurely. Also, at your age (or any age), I strongly suggest that you consider utilizing a TRUST with the current income to be distributed to your spouse, along with the HEMS provision for distributions from principal) or the UNI-TRUST concept, with your children being the ultimate beneficiaries in separate Trusts, per stirpes.
I understand the need to insure against catastrophic loss, but I thought that one benefit of having enough money in the bank is the ability to self-insure. If my kids' inheritance leads to a large tax bill for them, that means they're already getting a lot of money - I'm not sure it's worth sacrificing now for a little extra decades down the road. I do have a $2M term life insurance policy.
Re: cash poverty, that is hopefully temporary. It's mainly due to recently buying a second house (avoiding many years of private school tuition) and still keeping the first house as an investment (~50% paid for; still cash flow negative). The first two years of SEPP 72T distributions will go to paying back family for part of the down payment on the second house. I could do a cash out refinance on the first house but I refinanced it not too long ago and would prefer to continue to pay it off.
Our combined income is mid-six figures and I'd love my wife to stick to a budget but our monthly cash flow is positive enough and we generally maxed retirement contributions until this past year. Really, my mistake was focusing on retirement accounts to the exclusion of a taxable one. Which is what I'm trying to remedy with this SEPP 72T.
I have a custodial account for each child worth $100k. I had not considered using the Roth for their education - that is nice to have as a potential option. Do you have any thoughts on charitable remainder trusts?
Charitable Remainder Trusts are primarily for people who are CHARITABLY ORIENTED, or are looking for the "annuity" that they provide for people in later life. I am not extremely knowledgeable about them because none of my clients fit these criteria. You would have to talk to an experienced Estate Planning attorney as part of an extensive estate plan.
I would suggest that you and your wife both contribute $ 75,000 to a 529 plan for each of your children. I prefer the ones which allow you to invest them in mutual funds, rather than the older traditional approach of AGE-BASED accounts, which are really another name for "Balanced" or " Mixed Blend" accounts (both of which I conceptually hate). I recommend both Vanguard and American Funds for this purpose. This is what is called "Front-loading" the 529, and is the 5-years of $ 15,000/year gifting approach. (BTW, in 2026, you could both contribute an additional $75,000 to each 529 account, or to new ones.) This would be an excellent use of funds, but apparently you have everything tied up in the 2 houses and the retirement accounts. My personal opinion is that this is a better investment than the rental of the 2nd house.
The $ 2M term life insurance policy is great decision that you made, depending how long its term.
I will look into your suggestions, thank you again for your generous advice.
You are welcome. We went way beyond the scope of this website, and way beyond the expertise of most CPAs !!! (I was one of the 2% who passed the CPA exam on the first sitting, and practice differently than most tax practitioners, even at 82.)
