One of the challenges faced by advisors is to help their clients minimize income tax on their retirement savings. This includes avoiding the 10% additional tax (early distribution penalty) penalty when possible.

According to a 2019 GAO report:

• “…individuals in their prime working years (ages 25 to 55) removed at least $69 billion (+/- $3.5 billion) of their retirement savings early”
• “IRA withdrawals were the largest source of early withdrawals of retirement savings, accounting for an estimated $39.5 billion of the total $68.7 billion…”

Distributions taken by these individuals are subject to a 10% early distribution penalty unless they qualify for an exception. One of the exceptions is distributions taken under a substantially equal periodic Payment (SEPP) program, commonly referred to as a SEPP/72(t) payment because they are governed by Internal Revenue Code Section 72(t).

The rules for 72(t) programs have been updated under IRS Notice 2022-6, which is effective for any 72(t) payments commencing on or after January 1, 2023 and may be used for 72(t) payments commencing in 2022. Changes were also made under SECURE Act 2.0

While a 72(t) program can help the owner of an IRA or employer-plan account avoid the 10% early distribution penalty, only ‘suitable’ individuals should enter such an arrangement.