Wednesday, August 18, 2010

Getting Out Of 72(t) (SEEP) Distributions

Just in case you had not noticed, times have been tough lately for a lot of folks. Account balances are down, layoffs continue to affect many businesses and individuals, and many people are still unemployed. All of this means that more individuals are tapping their retirement assets early through 72(t) distributions.

That brings up two questions.

What happens if you get another job and no longer need those early distributions from your IRA and what happens if the IRA balance dropped so much that the early distributions have entirely depleted the account?

There are only three ways to get out of a substantially equal payment early distribution plan, otherwise know as 72(t) or SEPPs. All three options are drastic ones. The general rule is that distributions must continue until the later of five years or until age 59 ½, whichever is later, in order to avoid the 10% early distribution penalty.

The most drastic way out is death of the account owner. A slightly less drastic way out is the disability of the account owner. Both of those events mean that the early distribution payments can be stopped. The definition of disability is very restrictive - the account owner must be unable to perform any meaningful employment.

The last way out is a little known provision that came into being in 2002. We call it the Enron clause as it was a result of the collapse of Enron and the collapse of Enron retirement account balances. If the IRA account balance declines to a level where the early distributions deplete the account entirely, the account owner can stop the early distribution schedule and will not be subject to the 10% early distribution penalty on all prior distributions.

So, if you get a new job and no longer need these distributions, there is no relief for you (other than perhaps a change to the RMD method but that is a subject for another day). The distributions must continue unchanged until you come to the end of your payment schedule.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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