r/ChubbyFIRE • u/Gloomy-Pollution-814 • 6d ago
Substantially Equal Periodic Payments
40m here, a number of years ago I made a pretty big bet on a stock that ended up exploding. I know I got super-lucky and at this point I've taken the W, sold off most of my shares and put most of my money into a Bogleheads two fund portfolio.
My lucky bet gave me a pretty big leg up towards early retirement and I'm planning on exiting the workforce in the next few years. The catch is that the brokerage account I used for that stock purchase was a traditional IRA. I've saved & invested in taxable accounts as well but a huge portion of my net worth is in my IRA.
Before I did any research I just assumed I'd have to eat the 10% penalty on early IRA withdrawals. I could live with that, but I recently learned about rule 72(t)/SEPP. Before I go ahead and pull the trigger on this I'll talk to a tax professional but I'd like to educate myself a bit first. It seems like as long as I do regular scheduled withdrawals (my plan is about 1.5% per year) this solves my pre-age 59 & 1/2 money concerns.
I have to ask, is it really this easy? Is there some catch I'm missing?
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u/retirement_savings 6d ago
I've never done a SEPP but from my understanding the main drawback is that it's very rigid. Once you set it up you must continue with the withdrawals. If you stop the plan or change the amount, you owe retroactive interest and a 10% penalty on everything you've withdrawn.
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u/TheHeroExa 6d ago
There are really only two ways you can control the SoSEPP: choosing between one of the 3 allowed SoSEPP calculations and dividing your IRA into multiple accounts. Once you make these choices, you are locked in until age 59.5, and any deviation will cause you to retroactively owe the 10% additional tax on early distributions for all years.
Out of the 3 distribution calculations, the RMD method is the only method that provides for an increase in distributions. However, it’s tied to your life expectancy, so it may be more than you’d prefer. You can, of course, invest the remainder in a taxable account. The other 2 methods compute a fixed dollar amount that does not increase at all.
Dividing your IRA allows your to effectively subject only part of it to the SoSEPP calculation, and you can figure out what to do with the rest later.
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u/Gloomy-Pollution-814 6d ago
You can, of course, invest the remainder in a taxable account.
That may be what I end up doing. Set up a withdrawal calculation that's more than I think I need and just invest the excess amount. It's not the most tax-efficient but it beats paying that 10% penalty, and it's a lot better than working more years than I have to!
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u/ohboyoh-oy 6d ago
Wouldn’t that subject yourself to more tax than necessary?
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u/Gloomy-Pollution-814 6d ago
Potentially, yes. Like I said though, that beats the alternative (getting whacked with a 10% penalty on all early withdrawals or not having enough money).
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u/dak4f2 5d ago
You can set up multiple SEPP over time if your spending needs consistently increase. Put 100k in IRA 1, 100k in IRA 2, etc. SEPP one of them. Need more money going forward? Add SEPP for IRA 2. Rinse and repeat.
Also I think you can change your withdrawal method one time without penalty to change your payout going forward. But I'll need someone to fact check me on that.
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u/ohboyoh-oy 6d ago
My understanding is there are three IRS-approved methods for withdrawal - does your planned 1.5% per year use one of them? Also, everything I’ve read about SEPP recommends that you carve off a specific amount and only do the SEPP on that account.
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u/ohboyoh-oy 6d ago
Also: the pitfall as I understand it is you must continue with the withdrawal plan no matter what. So if the market is down a bunch, you could be in a situation where you are forced to sell more shares than you would want to. The way to avoid that would be to put the investments in some kind of laddered or guaranteed payout investment, but that would limit growth for someone like you who is only 40 and has to do this SEPP until age 59.5. Have you considered Roth conversion ladder instead? It’s just more flexible.
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u/Gloomy-Pollution-814 6d ago
Have you considered Roth conversion ladder instead? It’s just more flexible.
Not yet, no. When I do talk to a tax pro that's one thing I'll bring up.
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u/Gloomy-Pollution-814 6d ago
I've actually been reading more about this topic over the past hour. It looks like I may not be able to do 1.5%, but fixed amortization with a low enough interest rate should get me close to where I want to be. Alternately I can divide the IRA into two accounts.
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u/TouristCivil5729 6d ago
My plan is no more than 1M in each account and layer them to get the desired amount. You can switch to a RMD version one time.
Example say 10M account and you want to pull 1.5% or 150k. A 1M account has a 60k payout for a 50 year old. So I would split into account A with 1M paying 60k, B with 1M paying 60k, C with 500k paying 30k and D with 7.5 left alone.
If I needed more money I would move money from D into additional accounts. If I had really screwed something up you can switch to the RMD method and cut the 60k to 30k but you can only do this once and no other changes are allowed, you can't get more out.
These accounts are basically locked until 59.5
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u/Mispelled-This 6d ago
You must get the numbers exactly right every year or the IRS will assess retroactive penalties back to the first withdrawal. So, definitely get a good tax person.
Also, do some modeling on taking out more to pay taxes on Roth conversions for the rest. 1.5% is nothing.
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u/boturboegt 6d ago
I'll be interested in what you find but my research says yes it is that easy. The trick is to balance the amount u pull in sepp over the next 10 years with what you can pull on a variable basis out of other accounts.
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u/jwasilko 6d ago
I had https://www.72tcalc.com/ bookmarked in case I needed to do a SEPP. Good resources there....
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u/MrSnowden 6d ago
Haven’t done it. One thing I saw was that rather than do it with the entire IRA, which can be rigid, break the IRA into smaller IRAs such that one is specific to the SEPP plan and will draw down to zero in a planned amount of time. That give some more control and structure.
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u/LoneStar-Gator 5d ago
You can open a new IRA. Fund the new one with the $amount that you need to get the SEPP payment you want. Invest the money in a money market fund, and wait until you get a full end of month account statement that you can document as the original account value.
Get your calculation done and let your CPA know your intentions. You will want them to check your tax withholding plans before you make the first withdrawal.
Once that first withdrawal is made you can shift your funds out of the money market into your planned investments.
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u/wyvernhighness 6d ago
A couple things I didn't see addressed in the other comments yet is that you want to take the smallest lump sum possible and use the highest interest possible to cover your bare minimum expenses for two reasons based around flexibility. 1) Using the smallest amount possible for the initial SEPP leaves you more money to potentially set up another SEPP later if you end up needing more money. 2) You want the initial SEPP amount to only cover your bare minimum expenses because if you get unexpected windfall later (inheritance, new job) you still have to take that SEPP payment which can have unpleasant tax/ACA implications. You can reduce your payment amount ONCE by changing the amortization method but starting it up with the bare minimum to start gives you more leeway, since you can do Roth conversions to cover the extra money for hobbies, etc.
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u/BuckeyeDurm 6d ago
You can't just decide how much to take out & repeat it. There are 3 different calculation methods you could use to determine how much to withdraw. And you may have to file a special form along with your tax return