Understanding the 72t distribution (SOSEPP)

Wednesday, January 31, 2018 at 8:46 AM by Monica Silwanowicz CPA

A 72t distribution is shorthand for the Internal Revenue Code (IRC) Section 72, part t. The most popular provision of this code section is known as a Series of Substantially Equal Periodic Payments (SOSEPP) and is a method by which you can access your IRA funds prior to age 59 ½.

To take advantage of this rule, you determine the amount of the annual distribution from your IRA and then begin taking the distributions. Once you start the SOSEPP, you must keep it going for the longer of five years or until you reach age 59 ½.

Methods of Distribution:

  1. The Required Minimum Distribution method. This method calculates the specific amount that you must withdraw from your IRA (or other retirement plan) each year. The calculation is based on your account balance at the end of the previous year, divided by the life expectancy factor from one of the following three tables: the Single Life Expectancy table, the Uniform Lifetime table, or Joint Life and Last Survivor Expectancy table, using the age you have reached (or will reach) for that year. This annual amount will be different each year.
  2. The Fixed Amortization Method. Calculating your annual payment under this method requires you to have the balance of your IRA account, from which you then create an amortization schedule over a specified number of years. The number of years for your calculation is equal to your life expectancy factor from either the Single Life Expectancy table, the Uniform Lifetime table, or the Joint Life and Last Survivor Expectancy table, using the age you have reached (or will reach) for that year. In addition, you will specify a rate of interest of that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).
  3. The Fixed Annuitization Method. Calculating your annual payment under this method requires you to have the balance of your IRA account and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that year. Again, you’ll select a rate of interest of that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you’ve calculated your annual payment under one of the two fixed methods, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method, described here.

The amounts you’ve calculated are and will be the exact figures for your payments from the account, no more, no less. It’s not allowable to simply name your own amount and take that amount each year as you must use the prescribed amount from one of the methods.

You can impact the amount of the payment by adjusting the balance in your IRA. So, if you have more than one IRA available, you can rollover funds into one account and therefore increase or decrease your payment. This must be done prior to establishing the SOSEPP. You cannot deposit money into or remove funds from your IRA while the SOSEPP is in place, other than the required payments from the account each year.

For more about the SOSEPP, see the IRA Owner’s Manual.

Reference:
The 72t Early Distribution From Your IRA, Forbes, February 13, 2012

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