Over 60 million American taxpayers own individual retirement accounts (IRAs). These tax-protected retirement vehicles offer their owners a great way to save for retirement while mitigating the effects of taxes either today or in the future, depending on the product used. But for those looking to retire early and live off their investments prior to age 59½, an IRA either isn’t an option or comes with fairly steep penalties to withdraw early.
However, there is a third option: SEPP 72(t). SEPP 72(t), as it is commonly known, stands for Substantially Equal Periodic Payments and is outlined in IRS Rule 72(t). Rule 72(t) allows for penalty-free withdrawals from IRA accounts, as well as other retirement accounts such as 401(k) or 403(b) plans.
There are several rules dictating the amount that can be withdrawn, and you should really seek the advice of your financial advisor before setting out on such a path. However, Erik Schaumann, a former guest on the Best Ever Podcast, chose to utilize this rule to retire early.
Erik spent his days working at Shell and saving as much as possible. Several years ago, he had a conversation with his wife regarding retirement and how much was enough. Erik had been a diligent saver and believer in the FIRE (financial independence, retire early) movement while investing in passive real estate to grow his passive income.
A couple of years ago, Shell offered him a buyout, which he took. With his passive investments, he was able to cover most of his cost of living, but there was a slight shortfall. This is where the SEPP 72(t) came into play. By being able to tap into his IRA, without penalty, and at a small enough rate that his investment’s growth was more than making up for the withdrawals, Erik is able to fill the shortfall in his monthly budget, while also watching his retirement account balance grow.
Erik did warn that there are risks. Erik has most of his investments in income-producing real estate investments. These investments create monthly cash flow, and therefore he can withdraw his defined amount without having to liquidate assets. If your IRA does not have a cash balance to withdraw for each required payment, you could have to sell off stocks at a less than ideal time. The other major risk Erik mentioned is the penalties if you miss or cannot sustain these defined payments. If you chose to stop withdrawing prior to the defined term (five-year minimum or turning 59½ years old), all withdrawals would be subject to the early withdrawal penalty.
While SEPP 72(t) may not be an option for everyone, it certainly can be a powerful tool to help you achieve your financial independence. Utilizing this IRS rule allowed Erik to leave his job in his mid-40s, take a year to travel the world with his family, and provide for a life where is able to spend more time with friends and family while pursuing various projects as he desires. Erik’s only regret was not utilizing this rule two years earlier.
About the Author:
Evan is the Investor Relations Manager for Ashcroft Capital. As such, he spends his days working with investors to better understand their investment goals and background. With over 13 years in real estate, he has seen all sides of real estate from acquisitions to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan on Linkedin.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.