Leverage the Rule 72(t) Loophole for Early Retirement

Key Highlights

1. Rule 72(t) lets you take money from your retirement accounts early, before age 59 1/2, without an early withdrawal tax penalty.
2. When contemplating a strategy like Rule 72 (t), seeking advice from a Fiduciary Financial Advisor is crucial. Not all financial advisors are held to a fiduciary standard, and the guidance of a qualified professional can be invaluable.
3. This rule provides a neat way to access retirement funds using equal periodic payments (SEPPs).
4. The three distinct IRS-approved methods to calculate SEPPs are the Required Minimum Distribution (RMD), Fixed Amortization, and Fixed Annuitization. Each method has its own set of rules and considerations.
5. Early retirees can enjoy a steady cash flow and reduce financial stress.

Introduction

More and more people are opting for early retirement each year. Still, many are hamstrung by IRS regulations that impose an early withdrawal penalty of 10%, with few exceptions, for anyone accessing a tax-deferred retirement account, such as a Traditional IRA, ROTH IRA, or 401 (k), 403 (b), or Annuity before reaching 59 1/2. For those who would like to tap into these funds before turning 59 1/2, there is an option: the 72 (t) distribution. In this article, I will discuss the inner workings of the 72 (t) and other planning considerations when weighing the benefits of the strategy, including potential impacts from regular income taxes. When considering a maneuver of this nature, I highly recommend consulting with a Fiduciary Financial Advisor. Not all financial advisors are created equally, and many are not held to a fiduciary standard.

The Rule 72(t) Exception and Its Impact on Early Retirement

Rule 72(t) is a valuable tool for individuals planning early retirement. The rule permits retirement account holders to take systematic payments from their accounts before reaching the traditional retirement age without incurring substantial penalties. Your life expectancy and prevailing interest rates determine the amount you can withdraw each year. When executed correctly, this strategy can provide a reliable income stream, enabling early retirees to effectively manage their finances and relish the independence of financial freedom sooner than anticipated.

In addition to understanding the mechanics of Rule 72(t), early retirees need to consider other aspects of financial planning. Diversifying investments, creating a sustainable budget, and having a contingency plan for unexpected expenses are all critical components of a successful early retirement strategy. Seeking guidance from a qualified fiduciary financial advisor specializing in retirement planning can help individuals navigate the complexities of retiring early while ensuring long-term financial stability. By incorporating Rule 72(t) into a comprehensive financial plan tailored to individual goals and circumstances, early retirees can embark on their retirement journey with confidence and peace of mind.

Series of Substantially Equal Periodic Payments

Rule 72(t) excludes the 10% early withdrawal penalty, subject to certain restrictions. The loophole provides that, should you take the same annual withdrawal, to be determined by your life expectancy based on the uniform lifetime table and that of your designated beneficiary and prevailing interest rates, for a minimum of five years or until you reach 59 1/2 years of age, whichever occurs later. While you can bypass the 10% early withdrawal tax penalty, you cannot avoid ordinary income taxes at the Federal and, where applicable, State levels.

Caveats to the 72(t) Exception

As with all things in life, there are trade-offs associated with the exception:

1. If taking the withdrawals from an employer-sponsored plan, you must no longer be employed by the plan sponsor.
2. You are prohibited from making additional contributions to the plan while taking the SOSEPs.
3. You are committed to the periodic payments, as these cannot be changed unless due to death or disability.

The Mechanics of 72(t) Substantially Equal Periodic Payments (SEPPs)

Substantially Equal Periodic Payments (SEPPs) under the Internal Revenue Code Section 72(t) may present a viable option for those seeking to begin distributions from retirement accounts or annuities before the traditional retirement age. These payments enable account holders to access their retirement funds before the usual retirement age while avoiding the early withdrawal tax penalty. To set up SEPPs, the retirement account owner must calculate the payment amounts using factors like life expectancy, interest rates, and account balance. It’s important to understand how SEPPs work. This knowledge can help you make the most of your retirement income and handle tax implications well, so it’s advisable to consult with a tax advisor for personalized guidance.

Calculating SEPPs: An Overview

Calculating how much you will receive from your substantially equal periodic payments (SEPPs) is important if you want to use Rule 72(t) well. The IRS offers three main ways to do this: the Required Minimum Distribution (RMD), Fixed Amortization, and Fixed Annuitization.

1. The Required Minimum Distribution Method (“RMD method”) uses IRS life expectancy tables. This means your payments may change a bit year after year.
2. The Amortization Method looks at your account balance, an assumed interest rate, and the period you decide on for payments. It gives you fixed costs for a set period.
3. The Annuitization Method uses an annuity factor based on your life expectancy and an assumed interest rate. This helps find a fixed annual payment.

Each method has its pros, depending on your financial goals and how much risk you can take. Talking to a financial advisor is important to find the best method for your needs.

Why Choose Holland Capital Management, LLC?

Holland Capital Management, an independent Registered Investment Advisor (RIA), stands out among the top options for its commitment to offering transparent and impartial advice, personalized solutions, and diverse services. Backed by a team of expert strategic partners focused on delivering superior service and advice, our dedication to prioritizing your best interests and upholding fiduciary responsibilities has established Holland Capital Management as a trusted partner for individuals and families seeking trustworthy assistance in achieving improved financial results.

Holland Capital Management’s Approach to 72(t) Planning

Holland Capital Management offers comprehensive wealth management services to help wealthy individuals manage their money effectively. We assist with retirement planning, estate plans, and investments for the next generation. Our holistic approach includes family governance, wealth transfer, asset protection, and business succession planning to ensure unity and success across generations. Every person has unique financial circumstances, so we tailor plans to their needs. The investment management process is designed to generate higher after-tax, risk-adjusted returns. Trust advisory services are available to help you optimize tax, estate planning, and asset protection opportunities, working closely with your existing CPA and private legal counsel or our vetted recommended professionals. Insurance products are also provided for protection and advanced financial planning strategies, while flexible lending options allow you to access your wealth when needed without complications.

Our Credentials: CFA Charterholder and Certified Financial Planner® Professionals

When selecting a financial advisor, it’s crucial to understand the differences in their professional designations. With over 160 professional designations in the financial services industry, making an ‘apples-to-apples’ comparison can be challenging. However, it’s important to note that some designations are more about marketing than substance, so proceed with caution when considering lesser-recognized marks. The most reputable and recognized designations for financial professionals in the United States are the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner).

This article discusses the stringent requirements for the CFA® and CFP® designations. These include rigorous study and the passing of difficult exams. In contrast, some other designations may only require attendance at a training session and passing a multiple-choice exam.

The nonprofit CFA® Institute administers the CFA® certification. Many consider this the most complex financial services credential to attain, so you can expect more in-depth analysis and risk management with less guesswork when working with a CFA® Charterholder.

To earn the CFA® designation, there are many steps a candidate must complete:

1. Every candidate must demonstrate prior work experience involving over 4,000 hours of hands-on experience with investment decision-making or adding value to the process (or equivalent education).
2. To attain the credential, a candidate must pass Levels I, II, and III of the CFA® exam.
3. The average study time required to complete each exam level successfully is estimated at 300 hours.
4. Passing rates on the three exams are low; most people who attempt this process fail to complete it.
5. Those who do go on to become CFA® Charterholders are also subject to ongoing continuing education requirements.

The CFP®, or CERTIFIED FINANCIAL PLANNER designation, is also well regarded. Managed by the CFP® Board of Standards, this mark focuses less on investment management. Instead, CFP®s are focused on personal finances, including retirement, estate, and social security planning, as well as other financial consulting services such as a five-year income tax, cash flow and investment plan, and economic independence, business, or capital needs analysis. Our team includes CFA Charterholders and Certified Financial Planner professionals, who must operate with complete transparency and no bias to sell a particular product line or company.

The Certified Financial Planner Board of Standards creates and maintains the requirements for becoming a CFP®. The CFP® program requires significant study covering the following wealth management topics: Financial Planning, Portfolio Management, Retirement Planning, Estate Planning, and Philanthropic Planning.

Attainment of the CFP® designation requires one to meet education and experience requirements, proving prior hands-on experience with financial planning. Certified Financial Planners® are also subject to continuing education requirements to keep their knowledge current. The Certified Financial Planner Board of Standards also maintains ethics requirements to help ensure CFP®s live up to the highest ethical standards.

A Boutique Wealth Management Experience for High Net Worth Investors

As a client of Holland Capital Management, you will receive comprehensive wealth management services in a personalized boutique setting, ensuring you receive the attentive service you deserve. Benefit from the expertise of a Chartered Financial Analyst (CFA) and Certified Financial Planner™ (CFP®) who will assist with your financial and retirement planning needs, including executive compensation, and understand how crucial it is to have trustworthy investment advice for managing your wealth.

The investment management process is tailored to generate higher after-tax, risk-adjusted returns for private clients. Care is taken to avoid mutual funds in favor of individual stocks, bonds, cash instruments, and ETFs, enhancing our ability to manage risk at the security level. Trust advisory services are available to help you optimize tax, estate planning, and asset protection opportunities, working closely with your existing CPA and legal counsel or recommended professionals. Life insurance options are also provided for protection and advanced financial planning strategies. Flexible lending options allow you to access your wealth when needed without complications. Regular portfolio and financial goal reviews are also offered to ensure your wealth is managed effectively and aligned with your values and objectives for our private clients, including both long-term and short-term investments. With a focus on the long term, Holland Capital Management provides a boutique wealth management experience for high-net-worth investors, offering personalized financial strategies designed to maintain, grow, and transfer their wealth for future generations.

All services are conveniently managed through a single point of contact, saving you time and simplifying communication. Your assets are safeguarded by a leading independent custodian, ensuring security, safekeeping, and independent reporting.

As fiduciaries, we are legally required always to put our clients’ needs first. That entails providing direct investment advice without any concealed motives. We guarantee our independence to ensure that the advice you receive aligns with your best interests, as a corporate entity does not control us.

Navigating Complex Financial Landscapes with Expert Advice

Holland Capital Management specializes in assisting individuals in navigating their financial concerns on a significant scale. We consider all aspects of your financial situation, future aspirations, and risk tolerance. Using this information, our team will develop a tailored plan to help you achieve your financial objectives.

Holland Capital Management is a guiding partner in clarifying your financial objectives, whether preparing for retirement, saving for education, or managing estate planning. Their customized advice caters to your requirements, ensuring confidence in your financial direction. By opting for their comprehensive wealth and financial planning services, you can streamline the process of reaching your financial goals and feel supported in safeguarding your financial future at every stage.

Tax Optimization and Efficiency

Rule 72(t) allows you to withdraw funds early without a 10% penalty, but you still need to pay income taxes on the money you take out. At Holland Capital Management, we help you keep more money by reducing taxes through tax planning. Our team of independent strategic advisors understands tax rules well and provides tips to manage your finances efficiently without high tax bills. We assess your financial situation and goals to create personalized plans emphasizing smart investments and tax-efficient accounts. Our goal is to promote economic success while minimizing the impact of taxes. By focusing on tax optimization and efficiency, we aim to increase your post-tax income, allowing your wealth to grow and be passed on seamlessly to future generations. Rely on us for comprehensive investment guidance within legal limits.

Holistic Wealth Management

Holland Capital Management offers comprehensive wealth management services to help wealthy individuals manage their money effectively. We assist with retirement planning, estate plans, and investments for the next generation. Our holistic approach includes family governance, wealth transfer, asset protection, and business succession planning to ensure unity and success across generations. Every person has unique financial circumstances, so we tailor plans to their needs. The investment management process is designed to generate higher after-tax, risk-adjusted returns. Trust advisory services are available to help you optimize tax, estate planning, and asset protection opportunities, working closely with your existing CPA and private legal counsel or our vetted recommended professionals. Insurance products are also provided for protection and advanced financial planning strategies, while flexible lending options allow you to access your wealth when needed without complications.

Customized Portfolio Construction

At Holland Capital Management, our investment management services include a holistic, goals-based approach to wealth management that is personalized for each client. Our strategic partners at Tannin Capital provide custom-built investment portfolio solutions to our clients with a focus on preservation during periods of volatility as a priority. Utilizing proprietary technology and focusing on managing risk at the individual security level, we build portfolios around your existing assets and other non-liquid assets you may hold on your balance sheet, such as an interest in a privately held operating company, real estate, or other non-traditional investments. By taking a holistic approach and understanding your unique financial goals and situation, we tailor our investment management strategies to meet your specific needs and maximize returns on an after-tax, risk-adjusted basis.

Retirement and Estate Planning

Holland Capital Management specializes in assisting individuals in managing their finances effectively, particularly in preparation for retirement and ensuring a seamless transfer of wealth. We excel at creating personalized plans to facilitate a comfortable lifestyle for retirees and secure the desired allocation of assets for the future. Holland Capital Management tailors bespoke retirement plans by considering retirement timelines, lifestyle aspirations, income sources, and optimal investment strategies to provide clients with a stress-free retirement experience. Furthermore, they provide estate planning services to help clients devise innovative strategies for preserving and passing on their wealth efficiently while minimizing tax implications. Through close collaboration and a focus on crucial aspects such as wills, trusts, and charitable contributions, Holland Capital Management safeguards assets and ensures their intended distribution.

A Single Point of Contact

At Holland Capital Management, your primary contact, M. Chad Holland, is a CFA® Charterholder and a Certified Financial Planner® and earned an MBA at the prestigious Babcock Graduate School of Management at Wake Forest University, ensuring you take advantage of the full range of expertise. With over 25 years of experience serving high and ultra-high-net-worth clients throughout the Southeast, Chad leads a team of specialized independent strategic partners who coalesce around each client relationship to provide exceptional client service.

Specialized Services

At Holland Capital, comprehensive wealth management involves addressing aspects beyond investment management. We aim to cater to all financial aspects of our client’s lives and collaborate with expert independent partners to offer lending and life insurance options.

Customized Life Insurance & Lending Solutions

Life insurance plays a significant role in managing wealth and planning for the future. Through our strategic partnership with Vanbridge, Holland Capital Management offers life insurance options designed to fit your individual needs. They strive to tailor their services to meet your needs, whether securing your family’s financial stability in the future, supporting a buy-sell agreement, or addressing estate tax obligations.

We understand that getting a loan can be crucial to optimizing your financial outcomes, whether in the form of a mortgage, portfolio lending solutions, or business financing needs. We have partnered with several banks and independent lenders that provide many different loan options for our clients. Whether you need money to buy property, grow your business, or jump on other chances to invest, we will do our best to help you get the funds you’re after.

Ensuring Security through Independent Custodians

It is crucial to ensure the safety and security of your assets. The top financial advisor companies employ independent custodians, such as Charles Schwab, for this purpose. These third-party entities oversee clients’ assets, providing additional protection as they operate separately from the advisory firm.

The Role of Custodians in Asset Safekeeping

By partnering with independent custodians like Charles Schwab, financial advisors offer clients peace of mind, knowing their investments are safeguarded from potential conflicts of interest or mishandling. Independent custodians implement stringent security measures to prevent fraud and theft, adhering to strict protocols for seamless operations. When a financial advisor utilizes an independent custodian, investors can rest assured that their investments are shielded from risks and misconduct.

Benefits of Independent Reporting

When collaborating with a fiduciary financial advisor, a key advantage is having access to independently verified performance reports, thus preventing the manipulation of results. The reports should rely on time-weighted data to ensure an unbiased evaluation of the manager’s performance relative to the risk that was taken in the portfolio. This approach empowers you to make more informed financial decisions. Through impartial reporting, evaluating the advantages and disadvantages of investment choices becomes simpler, enabling you to select options that align with your long-term financial goals.

Conclusion

Internal Revenue Code Section 72 (t) provides a valuable option for those seeking access to their retirement accounts or annuities before reaching the traditional retirement age of 59 1/2 while bypassing the draconian early withdrawal tax penalty assessed by the Internal Revenue Service. It does not, however, come without potential drawbacks, and you may benefit from speaking with a qualified fiduciary financial advisor or CPA before making any decisions.

At Holland Capital Management, we provide independent, straightforward advice and exceptional client service, primarily serving high and ultra-high-net-worth clients. Our holistic wealth management solutions are designed to address a wide range of needs, including investment management, financial planning, retirement preparation, estate planning, life insurance decisions, and loan sourcing through our connections in the industry. With a team of independent, specialized, strategic partners in areas like portfolio management, trust administration, and lending led by an industry veteran and the resources of one of the largest independent custodians in the world, you can rest assured that your priorities are well looked after. You will be served by a single point of contact rather than an 800 number or generic email address, adding further peace of mind. Selecting Holland Capital Management means opting for a high-quality service dedicated to helping you achieve financial success.