72-t Distribution

[Marie Ota]

Thesefrequently asked questions and answers provide general information and should not be cited as any type of legal authority. They provide the user with information responsive to general inquiries. Because these answers do not apply to every situation, yours may require additional research.

Yes. Under Section 72(t), there is an additional tax of 10% on distributions to the taxpayer if the distribution is made before the taxpayer is age 59 . This applies to distributions from qualified retirement plans, which include:

If the taxpayer modifies the series of payments before that date, an additional recapture tax applies (see Q&A 9 for details). See Q&As 3, 10, and 11 for information regarding certain changes that are not considered modifications to a SoSEPP for this purpose.

All three methods require the use of a life expectancy or mortality table. These tables are specified in Notice 2022-6, based on regulations that apply beginning on January 1, 2022. The second and third methods require the taxpayer to specify an interest rate to be used (with certain constraints on the permissible interest rates).

Earlier guidance provided in Revenue Ruling 2002-62 PDF also allowed the use of the three methods above, but used earlier, pre-2022 mortality and life expectancy tables and provided different rules regarding permissible interest rates. To determine the amount of payment for a SoSEPP commencing--

Transition Rule: There is a special transition rule for a SoSEPP that was established under Revenue Ruling 2002-62 using the RMD method. Under this rule, the taxpayer may change the RMD method used to compute the SoSEPP amounts beginning with any year after 2021 by using the corresponding 2022 life expectancy or distribution period table indicated under Notice 2022-6, and this change is not considered a modification of the SoSEPP that results in the additional recapture tax imposed by Section 72(t)(4), described in Q&A 9. Once the RMD method of computing SoSEPP payments is changed in this manner, a reversion to using the earlier pre-2022 life expectancy or distribution period tables would be considered a modification of the SoSEPP and would be subject to the recapture tax imposed by Section 72(t)(4) (see Q&A 9).

If the taxpayer is applying the RMD method in accordance with Revenue Ruling 2002-62, the taxpayer must use the uniform lifetime table in that document, or the corresponding life expectancy tables referenced in the formerly applicable version of the regulation sections cited above:

If the taxpayer is applying the RMD method in accordance with either Notice 2022-6 or Revenue Ruling 2002-62 using the joint life expectancy for the taxpayer and the designated beneficiary from the applicable Joint and Last Survivor Table, and the designated beneficiary dies or is eliminated (and there is no other designated beneficiary for a later year), then that individual is not taken into account for later years and the taxpayer must use the Single Life Table to determine the payment under the SoSEPP for that year.

For purposes of applying the RMD method, the account balance is determined in accordance with the rules under Section 1.401(a)(9)-5, Q&A-3, and is generally equal to the account balance as of the end of the prior calendar year.

For purposes of applying the fixed amortization method and the fixed annuitization method, the account balance should be determined in a reasonable manner based on the facts and circumstances. For example, if the taxpayer determines the account balance as the account balance as of the last statement of the prior calendar year, plus any contributions or forfeitures allocated to the account balance since that last statement, minus any payments made since that last statement, this will be considered to be reasonable.

Note: Each SoSEPP is determined for one single account. The taxpayer cannot combine account balances of multiple accounts to determine a combined annual SoSEPP amount. If the taxpayer has more than one account, the taxpayer may establish a separate SoSEPP from each account that the taxpayer wishes to use (consistent with the rules for each account); each SoSEPP should be managed independently.

Bob, who turns age 50 on his birthday in 2023, is the owner of an IRA from which he would like to start taking distributions beginning in 2023. He would like to avoid the Section 72(t) 10% additional tax imposed on early distributions by taking advantage of the SoSEPP exception.

Under the RMD method, a payment under a SoSEPP is determined by dividing the account balance by a life expectancy determined under Q&A 5 above, using attained age(s) in the calendar year of the distribution. A new annual amount is determined in this manner each year.

The fixed amortization method results in the level amortization of the account balance over a specified number of years determined using a permitted interest rate under Q&A 4 and life expectancy under Q&A 5. The specified number of years is equal to the life expectancy under Q&A 4 (in this case, Bob selected the Single Life Table), 36.2 years. In this case, the interest rate Bob selected was 4.0%, which satisfies the rule in Q&A 4. An amortization factor based on 36.2 years and the selected interest rate of 4.0% is equal to 18.9559. This number was computed as the present value factor of $1.00 per year payable at the end of each year for 36.2 years using an interest rate of 4.0%. Thus, the annual amount for each year is $400,000 divided by 18.9559, or $21,102. Once the annual amount is calculated and paid under this method, the same dollar amount must be distributed in subsequent years.

Note: The SoSEPP is not considered to have commenced until the date the first payment is made to the taxpayer. The taxpayer should ensure that the SoSEPP commences within the calendar year for which the annual amount initially is determined.

Note: If the taxpayer has more than one SoSEPP (that is, by having each SoSEPP made from a different account), the taxpayer cannot aggregate the total annual amounts and take such total all from one account. Each distinct SoSEPP annual amount must be distributed from the account for which each SoSEPP was originally established.

Other than by reason of death, disability of the taxpayer, or a distribution to a qualified public safety employee under Section 72(t)(10), if the taxpayer modifies the SoSEPP by taking an annual amount that is either lesser or greater than the annual amount determined under the method of the SoSEPP as originally established by the taxpayer, the original SoSEPP is treated as no longer in effect for the year of the modification. As a result, two tax amounts apply in the year of the modification:

Once the SoSEPP is treated as no longer in effect, distributions in later years cannot be treated as made under the SoSEPP as originally established in a prior year. As such, the taxpayer is not under any obligation to take the originally determined SoSEPP annual payment for those later years. However, the taxpayer may establish a new SoSEPP in a calendar year after the year of the modification, based on the age(s), account balance, and interest rate applicable with respect to the year in which the new SoSEPP begins.

If the taxpayer completely depletes the assets in an individual account plan or an IRA with a final annual distribution that brings the account balance to $0 and is less than the required SoSEPP annual amount for the year, the taxpayer is not subject to the 10% additional tax as a result of this final annual distribution not being equal to the SoSEPP annual amount. Additionally, the recapture tax under Section 72(t)(4) does not apply. This is not considered to be a change in the method of determining the SoSEPP nor a modification of the SoSEPP.

No. The three methods described in Q&A 3 are automatically considered to satisfy the requirements of the SoSEPP exception to the 10% additional tax, but they are not the exclusive methods. Notice 2022-6 does not preclude other methods from satisfying the requirements of the SoSEPP exception.

The SoSEPP annual amounts must generally continue (in accordance with Q&A 2) in order for the taxpayer to avoid the additional recapture tax described in Q&A 9. For example, assume the taxpayer was born on August 15, 1968, and commenced taking SoSEPP payments on December 1, 2024, at age 56. The taxpayer may not take a distribution that is not part of the SoSEPP or modify the annual amount until December 1, 2029 (five full years after the date the SoSEPP commences), even though the taxpayer would reach age 59 on February 15, 2028. Alternatively, if the same taxpayer had established a different SoSEPP (on a different account) at age 52 with annual installments commencing on December 1, 2020, the taxpayer may not take a distribution from that account that is not part of the SoSEPP or modify the annual amount until February 15, 2028, even though the fifth annual amount would be distributed on December 1, 2024.

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59 are called "early" or "premature" distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.

* Retirement plans: The 10% additional tax generally applies to early distributions from qualified plans, 403(a) or (b) annuity plans and traditional IRAs, including IRAs that are connected to a SIMPLE IRA or SEP plan maintained by an employer. Qualified plans include traditional pension plans, cash balance plans, 401(k) plans and profit-sharing plans, among others. Distributions from a governmental 457(b) plan are not subject to the 10% additional tax except for distributions attributable to rollovers from another type of plan or IRA.

** Qualified public safety employees: The separation from service exception for public safety employees who are age 50 or over also includes specified federal law enforcement officers, corrections officers, customs and border protection officers, federal firefighters, private-sector firefighters, and air traffic controllers. An exemption is allowed for distributions from defined benefit plans, defined contribution plans or other types of governmental plans, such as the TSP. See IRC Section 72(t)(10). This exemption also applies to private-sector firefighters.

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