Early retirees will benefit from a new IRS regulation that allows them to take larger penalty-free withdrawals.

Another disadvantage of early retirement is the limited access to your nest money before the age of 59 and a half without paying a 10 percent penalty on your withdrawals. Despite the fact that a new IRS regulation makes it easier to access more penalty-free money, financial experts advise that you still need to examine your options.

Pre-tax 401(k) or individual retirement account withdrawals are generally subject to a 10 percent penalty on top of any applicable taxes.


However, there are some exceptions, including so-called substantially equal periodic payments, or SEPPs, which are a series of distributions for five years or until age 5912, whichever is the longer period. 72-hour payments are also referred to as 72-hour payments (t).

When it comes to retirement, “SEPPs have traditionally been a little-known but effective technique,” said Jeff Farrar, executive managing director of Procyon Partners in Shelton, Connecticut, describing its attraction for a retiree in their early 50s with a significant amount of money in the bank.

Your SEPPs are calculated using one of three formulas that take into consideration your account balance, a “reasonable interest rate,” and the ages of both you and the account recipient.

While the IRS previously limited interest rates to the same level as the preceding two months’ federal mid-term rates, the new guidance allows you to utilize a higher rate of 5 percent, which will dramatically increase payments.

Consider the following scenario: you have a $1,000,000 account balance and you’re 50 years old with a 45-year-old husband who is the designated beneficiary.

For January 2022, the rate was 1.56 percent, resulting in a maximum SEPP dividend of $36,151 per year, with a maximum rate of 1.56 percent. The new 5 percent interest rate, on the other hand, raises the annual payment to $59,307.

According to Farrar, “It works perfectly as long as the client realizes that they must maintain that exact draw for the needed period of time.”

If you don’t adhere to the regulations, you’ll be subject to a 10 percent penalty on all of your payments, as well as underpayment fines and interest if you make late payments.

The rule of 55 is a stipulation in a contract.

While larger withdrawals may be appealing, if you’re 55 or older and have a 401(k) that allows for early withdrawals, there may be a better choice, according to Brian Schmehil, a certified financial planner and senior director of asset management at The Mather Group in Chicago.

In addition to the “rule of 55,” another 10 percent penalty exception exists, which allows you to avoid early withdrawal penalties from your current 401(k) or 403(b) plan if you leave your work at the age of 55 or later. Additionally, some public sector employees may be eligible at the age of 50.

One advantage of the rule of 55 is that there is no specific payment schedule or amount to be paid each month. According to Schmehil, “the method is more flexible than a 72(t) distribution while still avoiding the 10 percent early withdrawal penalty.” This provides your plan permits it, of course.

Of course, you’ll want to do some financial planning to make sure you can afford an early retirement with either technique, he explained. Then you can collaborate with a financial counselor and a tax professional to reduce levies and 10 percent penalties to the absolute minimum.

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