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72T without retiring
- Date of Birth: 1981
- Age: 40
- 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.
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.
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.
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.
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.)