This is a favorite post to write every year, because as far as I am aware, I am the youngest person to have set up Reg 72(t) distributions from an IRA account starting at the age of 36. So, like much of my life, I am going against the grain, against what many of the so called experts and professionals would ever recommend. So with that said, here is the completion of my third year of penalty free withdrawals from my IRA.
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. 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 20 years from 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.
Moving on to 2018, I continued to pull the same full substantially equal periodic payment of $10,829.03. The only difference I did for 2018, was that I completed taking all of my distributions by the end of November. This allowed me to double check my distributions for the month of December and make sure I didn’t have any errors for the year.
So for 2018, here is are my distributions from my SEPP IRA:
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.
Looking at the above table (which I have added additional data for 2018), we see my stub year (2016), I had to take out $3609.68 to satisfy my calculation. That year, the portfolio kicked out $3309.97 in dividends, meaning I had a deficit of -$299.71. The balance of the account closed at $348,266.83 on 12/31/2016.
2017 was the first full year of taking out the 72(t) distributions. I had to withdraw the full amount of $10,829.03. Meanwhile the portfolio kicked out $10,497.65 for an overall shortfall of -$331.38 for the portfolio dividends covering the withdrawal. The IRA closed out the year at $390,634.64
2018, I consider a crossover year. Being that it is the first year the dividends from the account more than cover the required distribution. Dividends from the SEPP IRA for 2018 came in at $12,641.46 with the distribution holding at $10,829.03, creating the first year of excess dividends of $1,812.43. With the excess dividends, I was able to reinvest the money at no cost and this will help in creating additional dividends for 2019. For the remaining approximately 20 years, I do not anticipate my dividends dropping below the distributions amount and also to see the dividends continually to grow. With the drop in the market, the account took a hit in 2018 and closed out at $363,609.72, still above the amount I established the 72(t) distribution. Also a reason I went with a conservative withdrawal, so I don’t need to dip into the principal.
For 2019, my projection is for the SEPP IRA to kick out a little over $13,000, giving a little extra buffer and creating additional funds to be reinvested in the account (and creating additional dividends for 2020).
So now, I would like to take a look at how the portfolio is holding up after year three 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.
S0, the value in this account has gone down -6.92% for 2018, had the distributions not been taken from the account, performance would have been -4.14%. From inception of setting up the distribution in September of 2016, the account is still up 5.26%. Total distributions for the 3 years are totaling $25,267.74. So had the distributions not been set up, the account would sit at $388,877.46 or a total return of 12.5% since September 2016 (nothing spectacular).
How are my plans working so far? Everything is going almost exactly as planned. Ideally the account would have held it’s high from when it crossed over $410,000, but the market was turbulent in 2018. In 2019, this portfolio will kick out dividends of $12,738.78 and I will also receive an additional $177.79 in special dividends from CME, bringing total dividends for this portfolio to $12,916.57 in 2019, 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 $12,916.57 is just a starting point, I wouldn’t be surprised to see around $13,500). That is $2,087.54 more than I have to take out to satisfy my 72(t) plan. Which means I will be able to reinvest 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 ($363,609.72), my withdrawal rate sits at a paltry 2.83% from this portfolio, and again I’m only taking out dividends. The current dividend yield on this account sits at 3.47% ($12,641.46/$363609.72). So yeah, the plan is happening almost 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.
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 3. What is your plan for income in (early) retirement?
For more information on Reg72(t) distributions and my withdrawal strategy check out the following links:
Intro to Reg 72(t) (most trafficked post on my site)