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Should You Begin 72(t) (SEPPs, SOSEPPS) Distributions in the Fiscal or Calendar Year?

ed slott IRA 72(t) paymentsA client is setting up a 72(t) distribution schedule - substantially equal periodic payments that will be exempt from the 10% early distribution penalty. Her first distribution won't be made until September and she would like to take monthly payments. But she also wants the full distribution for the first year, not just four payments. Can she do this?

The answer is yes she can. An account owner can either use a calendar year for monthly payments or a fiscal year with a short first year and short last year.

So how do you go about doing this? We tell advisors and clients to keep things as simple as possible. The more changes or variations there are to the payments, the more likely it is that a mistake will occur. Mistakes in a 72(t) payment can be fatal. They can destroy the payment plan and leave the account owner subject to the 10% early distribution penalty retroactively for any of the payments made before age 59 ½.

The two easiest ways to get out a full current year’s distribution when monthly payments are desired are to take the 12 months as one for the current year and set up the monthly payments beginning next year. The other way would be to set up the monthly payments beginning in September of the current year and take a one time, lump sum distribution of the remaining monthly payments for the year.

What if a mistake is made this early on? The payment plan should be terminated and any applicable penalties should be reported on IRS Form 5329 and paid. A new plan can be established in the following year. Make sure a new calculation is done for the new plan. Don’t use the old one from the plan that blew up. Interest rates change monthly and you are limited in the rates you can use when you set up a 72(t) plan.

- By Beverly DeVeny and Jared Trexler


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Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.