Understanding Retirement Distribution Rule 72(t) and SEPP
Find out how you may be able to help clients who need access to their money before age 59½ to avoid penalties on early withdrawals from their retirement accounts.
Get the details on rule 72(t) and SEPP
Internal Revenue Code section 72(t) allows penalty-free1 access to assets in IRAs and employer-sponsored retirement plans under certain conditions, such as account holder death or disability, first-time home purchases, and taking substantially equal periodic payments (SEPP).2
How does it work?
- Client must take a series of substantially equal periodic payments (at least annually).3
- Client must continue taking the distributions (even if they no longer need them) for at least five years or until they reach age 59½ whichever is longer.
- While these SEPP distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes must still be paid on the distributions for the tax year they are withdrawn.
Who is eligible?
- Client must generally be separated from service, or have some other triggering event, in order to take distributions from a qualified plan.
Who benefits?
- Individuals under age 55 who have left work, have substantial retirement savings, and need income—possibly as a bridge to later retirement benefits such as Social Security and pensions.
- Clients who are transitioning between jobs and require temporary income.
How do they benefit?
You may be able to help clients who change jobs or leave their jobs before the age at which penalty-free distributions are allowed to avoid penalties on early withdrawals from their retirement accounts.
Want to know more?
Let’s talk about Fidelity Advisor Traditional IRAs for your clients.
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1. Distributions from a retirement account before you reach age 59½ (or distributions from a qualified plan, before you reach age 55 and are separated from service) may be subject to a 10% early withdrawal penalty under Internal Revenue Code section 72(t) in addition to any applicable income taxes on the distributions.
2. Internal Revenue Code section 72(t) provides several exceptions to the 10% penalty on early distributions; however, this piece focuses specifically on substantially equal periodic payments. Not all employer-sponsored retirement plans allow substantially equal periodic payments. Your client should check their plan's documents to confirm if these distributions are permissible and to determine the terms and conditions for such distributions. Remember, if your client does take these distributions, regular income taxes will apply.
3. Substantially equal periodic payments made less frequently than annually may be subject to a 10% early withdrawal penalty.
The above information is educational in nature and should not be construed as legal or tax advice.