By taking substantially equal periodic payments (SEPP) under Reg 72(t), an individual is able to take money out of an IRA prior to age 59.5 and not have to pay the 10% early distribution penalty (just your normal income taxes though). I’ve gone into pretty great detail explaining 72(t)/SEPP distributions here, so I will not rehash the full story in this article.
In September of 2016, I elected to set up a 72(t)/SEPP at the age of 36, based on an attained age of 37 for that year. I elected to treat my first year as a stub year and prorate my distribution to 1/3 of my calculated amount (based on the amortization method). That means in 2016, I only had to take out $3609.68 compared to the full annual amount of $10,829.03. I did this because I had other funds to live off and taking the full amount would have caused me to have to actually pay taxes in 2016. Again, I have written about how I only paid $10 in taxes in 2016 here, so will not go over it again. But basically I have super low expenses, so I don’t need a whole lot of money to live, but don’t have a deprived life at all.
In 2017, I went back to work, but would continue my plan with my 72(t)/SEPP distributions. The work was never meant to be a second career, just easy money for a short term, and I am counting down the days until I leave work for a second time. Breaking my 72(t)/SEPP plan would subject ALL distributions to the 10% penalty and interest. The difference in my 72(t) distribution for 2017 vs 2016, is that in 2017 I have to take the full amount. Going back to work has no affect on the SEPP distributions what so ever. For 2017 and going forward until I reach age 59.5 (roughly 21 years now) I have to take $10,829.03 per year. It really doesn’t matter how I take the money out (monthly, quarterly, annually) as long as I take the correct amount out, down to the penny, no more…no less. For a very detailed post on my actual withdrawal strategy for early retirement read this and this.
So for 2017, here is what my distributions from my SEPP IRA:
I actually took the last distribution on 12/5, that way my OCD kicks in and I can check 20 times to make sure I’ve taken out the proper amount. I have often mentioned in my writings that my 72(t) strategy was conservative. It was set up to take out just the dividends from the portfolio. Given that I have a bias to dividend growth investing, over time the dividends will be substantially more than what the portfolio paid in 2016.
So now, I would like to take a look at how the portfolio is holding up after year two of early penalty free distributions.
In 2016, my balance on this particular account at the time I calculated the distribution stood at $345,415.12. The dividends were approximately $10,900 on this portfolio. That means, not counting dividend increases or special dividends occurring in 2017, my 2017 SEPP would be satisfied by just the dividends and I would not have to sell any holdings. Remember in 2016, I only took out $3609.68 in SEPP distributions.
In 2017, I took out the full $10,829.03 to satisfy my SEPP. As of 12/15/17, the balance in this portfolio sits at $391,946.65.
S0, the value in this account has grown 13.47% after taking out distributions totaling for the 2 years of $14,438.71. Had I never set up the 72(t), the value of the account would actually stand at $406,385.36 for a return of 17.65%.
How are my plans working so far? Everything is going exactly as planned. In 2018, this portfolio will kick out dividends of $11,575.49 and I will also receive an additional $354.25 in special dividends from CME, bringing total dividends for this portfolio to $11,929.74 in 2018, at a minimum (The reality is that many of my holdings in this account will announce dividend increases at some point in the year, so $11,929.74 is just a starting point, I wouldn’t be surprised to see around $12,500). That is $1100.71 more than I have to take out to satisfy my 72(t) plan. Which means I will be able to start reinvesting that excess back into the account, which also means that will generate additional future dividends in the account. The other interesting thing to look at is the withdrawal rate. Based on my amount needed to be withdrawn ($10,829.03) and the current value of the account ($391,946.65), my withdrawal rate sits at a paltry 2.76% from this portfolio, and again I’m only taking out dividends. So yeah, the plan is happening exactly as expected and I still insist it is a highly conservative strategy, despite “experts” saying someone should not set this up at my age.
One thing that I will do differently in 2018 is complete my total SEPP by the end of November. One month to just quadruple check my work and plan for 2019.
As mentioned in one of the links, the plan is still to have my 72(t)/SEPP changed over to the one time allowable required minimum distribution method in approximately 2027/2028. I believe the account could be close to double the value I initially set up the distributions on in 2016. So, by 2027-2028 I am projecting this account to be in the neighborhood of $700,000 and dividends of approximately $20,000. Switching to the RMD method at that time and going forward will allow me to received an even greater amount from the account, but should still just pull approximately just the dividends in the account.
There you have it folks, a wrap up and review of my 72(t)/SEPP distributions after year 2. What is your plan for income in early retirement?
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