April 6, 2025 • 61 mins
One of the most frequent questions we get about retiring early is: 'How do I get money out of my retirement accounts before age 59.5, without paying the 10% penalty'? This episode answers that question and more with CPA and 72(t) expert, Bill Stecker. Bill is the founder of The Marble Group which specializes in federal income taxes and early retirement distributions. He's also the brilliant mind behind the website '72tcalc', hands down the most comprehensive resource we've found specifically focusing on 72(t)s. Cohost Jackie knows because she set up her own substantially equal periodic payments (SEPP) using IRS rule 72(t) in 2024 and will share some details of her first-hand experience.
If you've been fearful and confused about how 72(t)s work, fear no more! In this episode, we thoroughly break down everything you need to know in a way you've never heard before. We also discuss more than a dozen other ways the IRS allows you to legally avoid federal tax penalties for early withdrawals from your retirement accounts. To make sure we did this topic justice, we turned it into a 2-part series. This is part 2, so make sure you go back and listen to part 1 which was released on March 30th. Both episodes are packed with valuable insights and practical tips for anyone considering early retirement.
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Most recent IRS list of exceptions to 10% tax penalty on early withdrawals
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
Okay, so last week we had an illuminatingconversation with Bill Stacker, owner
of the website, 72 calc.com, but he'sa CPA and an absolute genius when it
comes to early retirement strategiesand specifically the 72 T. Well, we
were really getting into the nittygritty, so we had to continue our
(00:22):
conversation with him, right, bill?
I mean, he is a savant.
He is a genius.
we could talk to himfor hours, and we did.
So even after this episode,it was just plain fun.
I never thought talkingtax code would be so much.
Fun, so before you listen tothis episode, you really gotta do
(00:43):
yourself a favor and go back tolast week's episode, part one of Mr.
72 T.
I think I did something right.
So I didn't realize that the amortizationmethod was like the one that just
makes the most sense for most people.
Because when I was doing it, it allowedme to segregate the smallest amount
(01:07):
of money in a separate IRA that wouldgive me the most monthly amount.
I was looking for 15, 000a year for five years.
And using the amortizationmethod I only had to lock up, I
think, 240, 000 worth of my IRA.
when I found your website, you madethat crystal clear and I'm like, okay,
(01:29):
everything he said made so much sense.
I wish I would have uncovered thissooner because I kept bouncing
between the methods and just wasn'tclicking and then you made it.
Crystal clear.
essentially what you're doing withthe 72T plan is saying, aha, it's
multi year, it's minimum five,could be more to get to age 59 and a
(01:52):
half, and you are self annuitizing.
Distributions.
You're your own insurancecompany in that context.
Yeah, exactly.
And you're covering a gap.
That you plan on having, just like Jackiedid, she's going to have a gap of five
years till 59 and a half when she, andso you're basically creating income floor
(02:14):
at some level so that you can , make itto your till everything's out of jail.
who can make a mistake.
First person.
Me.
I'm in the theory business.
I'm in the plan design to causedistribution streams to occur.
And I'm going to opine to you, essentiallya multi year legal contract that says,
(02:41):
I guarantee this plan is right, right,no surtaxes, no interest, no penalties.
Now, if I make a mistake, and I canbe proud to say I've never made one to
the best of my knowledge in this arena.
That's why I carry errorsand omissions insurance.
(03:32):
We need to talk today about also there'sthree different methods of calculating
Your 72 T SEP payments, so to speak.
Can you go through those and tell uswhich might be the most popular and
the most valid to help us be flexible?
Okay.
if you read all of the popularliterature, everything will start by
(03:55):
telling you there are three methods andthey are amortization, Annuitization
is number two, and what's calledminimum method is number three.
Now, I will tell you that, well,let's get practical for a moment.
let's pick a method, but let'stest it to see if it's of any use.
(04:20):
And those tests might bemaximizes my distribution dollars.
Per amount of IRA dollars devoted tothe plan, I think that's number one.
And for that matter, that's kind of numbertwo and number three on the list of what
(04:40):
makes for a good computational methodologyin that context, the amortization method.
Is the only one that works.
Everything else is an also ran.
Don't bother.
And amortization requires three variables.
(05:01):
We talked about it before.
An account balance.
Life expectancy and an interest rate andthe math is the, PMT function in Excel.
And it is for all intents and purposes.
It is the same math that your banker usestoday to compute your mortgage payment.
Yep.
And annuitization,
if you want to know why it fails.
(05:23):
I've got a couple of page rightup about from some actuaries
that tells you why it fails.
It just always gives you a smaller number.
Minimum method fails.
Because, again, for two reasons.
One, the minimum methoddoesn't use an interest rate.
So, guess what?
You put the same factors in amortization,put zero in the interest rate, and
(05:48):
you get the minimum method number.
And so, say to yourself, Well,gee, I have, 800, 000 in my IRA.
I would like 50, 000 a year.
As, because that's what theamortization formula tells you.
And then you jump over to theminimum method, and it says,
well, you could have 25, 000.
(06:08):
Don't you just kind of go,no, I'm not interested.
I know what the literature says.
The reality is, it's amortization,
thank you for that.
So I think I did something right.
So I didn't realize that the amortizationmethod was like the one that just
makes the most sense for most people.
Because when I was doing it, it allowedme to segregate the smallest amount
(06:33):
of money in a separate IRA that wouldgive me the most monthly amount.
I was looking for 15, 000a year for five years.
And using the amortizationmethod I only had to lock up, I
think, 240, 000 worth of my IRA.
when I found your website, you madethat crystal clear and I'm like, okay,
(06:55):
everything he said made so much sense.
I wish I would have uncovered thissooner because I kept bouncing
between the methods and just wasn'tclicking and then you made it.
Crystal clear.
so you need to choose the method.
Okay.
What are the other piece?
You mentioned the otherpieces of information.
Can you sort of list out the other twoor three pieces of information that you
(07:15):
need in order to do the calculation?
And you do have a calculatoron your website, by the way.
That's very helpful.
Are you talking aboutoperands in the math?
Well so you, got a greatcalculator that does all of that.
But before someone starts tosay, let me figure this out.
What other pieces of informationlike you mentioned an interest
rate, what are the other, I guess,
(07:36):
Okay,
of information?
obviously getting anaccount balance is easy.
often than not, you look it uponline and boom, there it is.
The second piece of informationis an interest rate.
And what the IRS tells us is you can use.
Up to, so this is going to be aceiling, 120 percent of the midterm
(08:01):
applicable federal rates from eitherof the two months preceding the
month of the first distribution.
What a mouthful.
I know.
It's awful, but kind ofa two edged sword here.
It's easy.
To look up federal rates, they'reall over the place on the internet.
(08:22):
and you can actually look at the monthlyrevenue rulings coming out from irs.
gov to say, and it'sright there in the chart.
For example, the current rate is 5.
43%, which will be, you canfirst use in March of 2025.
(08:43):
Okay, so you got to go grab that ratefirst now in the latest Revenue notice
which came out in 2022 the IRS actuallygave us also a floor rate for the first
time Which is 5 percent which meansEven if the midterm applicable federal
(09:07):
rates are all in the fours and lower,which they had been for a decade of
the, say, 2010 to 2020, you just use 5%.
So you got a floor at 5 percent andit's at the moment growing higher.
(09:27):
What's the April rate, the Mayrate, June rate going to be?
I don't have a clue.
I stopped guessing long ago.
It's probably going to be in that range.
And the amortization formula issensitive to that interest rate.
you can go to my calculator.
(09:48):
You can use, like I say, the PMTfunction in Excel, you'll get radically
different distribution amountsas you change the interest rate.
So what's interesting to me here, and wetalked about the 4 percent rule being
a safe withdrawal rate, and you'retalking about 5 percent and portfolio
construction within your IRA from whichyou take your distributions according
(10:11):
to the SEP rule becomes important too,
right?
Well, there's a coupleof things that work here.
Whole bunches of well learnedmathematicians, way smarter than me, have
figured out this safe withdrawal question.
And they seem to coalesce in
(10:32):
the neighborhood of 4 to 5%.
And so what is the safe withdrawal rate?
Safe withdrawal rate istheoretically meant to be that
amount indexed for inflation overusually 30 years to basically
solve the question or the dilemma.
(10:54):
How do I ensure that I goprone with five bucks left?
As opposed to being vertical and brokein terms of a distribution stream.
That's a totally different, towhich by the way I subscribe.
Whether you listen to Bill Bengen, whoyou had on earlier, or whether you read
(11:17):
the Trinity study from the late 1990s, youget all of those same kinds of answers.
Conversely, here we're justwrestling with a five year tax issue.
And so, even though you might have 800,000 in your IRA today, and my math says
(11:38):
you can take 50K, which is about 6.
2%, I think that's okay because allwe're talking about is five years.
We're not talking about 30.
or
40 years.
that's the critical differenceso people understand they're not
going to deplete their portfolio.
they can segregate it, right?
well, also new sources of income are goingto start kicking in such as you might
(12:01):
be lucky enough that you've got definedbenefit pension that might be kicking
in and, or you're in a public servicefunction that still might have a pension.
Social security, socialsecurity will still be there.
Take it to the bank.
Now, when can you startreceiving full benefits?
(12:25):
That, we already know, thatone, that guy's moving.
Aren't we at 66 years and 10 months old?
I
don't know when it goes to 67.
It either just did or
if,
yeah, I think if anyone hits it like2025, maybe 2026, it catches everybody
(12:46):
at that point where it's now 67.
And you're right, it will change theway it looks will likely change
or the year that you can take it.
However, Social security isgoing to be there in some form or
fashion.
So basically, there is a higher,quote unquote, safe withdrawal rate
because we're time limited, generally.
you can stretch your time out 10 years,though, and you got to be a little bit
(13:08):
more careful, I would imagine, becausepeople would be worried they don't
want to deplete their SEP portfolio.
And as a tangible example, Jackie,are you willing to share with us
what you did in order to createthis plan and what you invested in
and how you came to your number?
Yeah.
So I started out and again, I did havesome brokerage money that kind of ran
(13:32):
out and I didn't want to use it all.
And I was starting to use myRoth contributions and I'm like,
okay, I should want my Roth.
account to grow more, right?
Because when I take thatmoney out, it's tax free.
So I'm like, why am I doing this?
Let me go ahead and do a 72T.
So I had just turned 55 at thetime I decided to do this, but
I was thinking about doing itfor years ever since I retired.
(13:52):
Okay.
So The amount that I needed becauseI didn't want too much coming out
because I do get subsidies formy health insurance and things
like that, because I'm on the A.
C. A. And so the amount I cameup with was 15, 000 a year.
Okay.
That's how much I want it.
So I backed into it.
So I used, as Mr 72 T was saying, I usedthat number plugged into a calculator
(14:15):
and Bill, maybe you can clarify this.
I use the amortizationmethod as you suggest.
I believe I had to put in my age andsomething about my life expectancy.
I had to check that table.
So I'll put that number in there.
And it came up with roughly 240, 000.
Now I had already had, and Bill, Igot a bunch of different IRAs.
(14:36):
So I already had an IRAthat was roughly that.
So I used that IRA.
It was Schwab and I called up Schwab.
Because somebody had told methey had to fill out this form
and they had to go in person.
You don't have to do all that.
So I did all my stuff online and Icalled Schwab expecting to get someone
that has no idea what a 72 T is, buthe did know and he was very helpful and
(14:58):
really at that point, I already did allthe hard stuff as you were explaining.
I did the planning.
I ran the numbers and all I neededfrom him was how do I set up
these equally Annual withdrawals.
I want it to set it up annually.
You could set it upmonthly if you want to.
So basically it's an online form.
You do it like you doany other withdrawal.
(15:19):
And I said, was almost likeautomating this whole thing
as far as the payments go.
So I said, every.
December 1st, I want 15, 000 dollars orwhatever that exact number was paid out
to me into this account and I was done.
Right.
Actually, you just touchedon three new issues.
(15:41):
Okay.
Oh gosh.
One is I remember I said youhave to pick a life expectancy.
Correct.
And I did.
I had to
There's three permissiblelife expectancies.
There's what's called single.
If you're married, you canalso use joint and several.
Okay.
and if you're, you can alsouse what is called uniform.
(16:03):
Which is nothing, it's uniform lifeexpectancy is identical to joint several
life expectancies with an assumption thatyour surviving spouse is 10 years younger.
Okay.
so I'm single, I'm married.
So went with the single,
Right now of those three numbers haveto go back in history If we look back
(16:25):
to last century, quote unquote, theWild Wild West days of 72T plans, ask
five actuaries for a life expectancytable and you would get nine answers.
another
confusing
thing.
they were all over the place.
Finally, in 2002, the IRSsaid enough of this nonsense.
(16:45):
One table, and then, which is the singletable, and then the JNS and the uniform
tables are simply derivative tables.
and it's always the single tablethat gives you the smallest number,
which in that math formula givesyou the biggest annual distribution.
(17:05):
so a lot of this stuff with the72 T have become a lot easier.
I remember right after I retired,when I was looking at this
stuff, was overwhelming to me.
And then as time went on, Isaid, well, let me revisit, it.
And then there was these changesthat you have already talked about
that just made it less intimidating.
So I'm hoping that if anyone hasconsidered this or is considering
(17:25):
this, give it another look betweenthis episode, your guide that you
offer for free on your website.
It makes it much easier.
There's calculators out there.
You've got one on your website.
Dinky town.
net has a great one andthere's a couple other ones.
So, bill yacht to your,Answer to your question.
That's how I did mine.
And I felt much better doing it,especially after I found this 72
(17:50):
T Calc website and the guide I hadall kinds of crazy question and he
answered every single one of them.
So it was good.
Okay, Bill, what you got?
So, Mr. 72T, you mentionedtwo more things that she
I brought
the next two.
One is just so people are aware.
sidelight really.
When you start these distributions,some financial institution is
(18:13):
going to issue you a document.
It's called a 1099 R. The R standsfor retirement distributions.
And they will only issue one1099R per distributions per IRA.
So you talked earlier about takingmoney once a year versus once
a quarter versus once a month.
(18:36):
The internal revenue service has nopurview to look at your transactional
history within or on an intra year basis.
They can't.
that's why Schwab, in your case,Fidelity for somebody else, issues
one document per year, which is thesum of all distributions from the IRA.
(19:01):
How you actually distribute is yourbusiness and your business only.
so you're saying so I could go in andI could switch my automatic withdrawals
to monthly or quarterly as long as itstill equals that exact annual amount.
is correct.
Okay,
I don't
necessarily recommend it.
But what you just said is true.
The third issue I want to bring up isin every case, you've got a financial
(19:26):
institution, usually a biggie.
And you think that they are yourtrustee and your custodian and they are.
And you think, well, whatdoes my trustee owe me?
And the answer is.
Wait a minute.
Stop the bus.
Back up three stops.
They're a bank.
(19:48):
First banker's rule.
Keep the money.
Second banker's rule.
Protect all of myself and my money.
Meaning, they take a blindeye to your 72 T plans.
They don't care that it is a substantiallyequal periodic payment or that you're
(20:10):
doing it from the separate service atage 55 or age 50, because I used to work
for the NYPD, they don't care, they sayto themselves, we know your name, we
know your address, we know your date ofbirth and we know your account balance.
And we know you took bucks out.
(20:32):
Therefore, I'm going to giveyou a 1099 R, that's the law.
Now it's your job as the taxpayerto complete what's called form 5329.
It's another, pardon me, busy IRSform, but you got to do it, which
(20:52):
basically says.
Yeah, I took an early distribution,and here's my reasons, because it
could be more than one, for havingtaken the distribution, and it is a
qualified reason, so the 10 percentsurtax plus interest does not apply.
(21:13):
IRS, listen to me, don'tlisten to my trustee.
He was not doing me any favors.
Yeah, that's really important.
And just to stress your point, I have madeother withdrawals like from my Roth IRA.
It's the same exact form and I haveto tell them what was my reason.
(21:34):
And my reason I am taking out thecontribution portion which they ask
me, how much is your total IRAs?
How much did you takeout so far to determine?
Oh, yes, she is actually stilltaking out the contribution portion.
I get the same and I already got my form.
I get the same exact form, exceptthe reason for that is different.
(21:54):
And you're right.
It's a question between me as a taxpayer.
And my taxes in the IRS, notnecessarily the custodian.
If anything, they wantto be held harmless.
I'm
Yeah.
Well, They do not want to be ever accusedof being in the tax advice business.
That's the whole issue.
so, it brings up a couple of pointsand we're going to have to talk in a
(22:15):
minute about mistakes you can make.
But for me, it's smart that Jackie doesit on September 1st and in one payment.
That's probably the easiest way todo it because remember that your
custodian can dilly dally and take time.
To issue the payment, and if you doit after December 20th, you could get
screwed with a mistake where it endsup being issued in the first part of
(22:37):
January, then totaling up all your things.
If you do it monthly, you've got tomake sure that it's exact and within
a dollar, as you say your book,but a couple of questions here for
me Jackie, what do you invest in?
and the reason I ask is because,You Say you deplete this thing
before five years what happens then?
(23:01):
Okay.
Well, I guess I need Mr. 72T to answer that question.
So if I deplete it the four orfive years or before I turned
59 and a half, what happens
Well, there's good newsand there's bad news.
The bad news is four years ago, youstarted with half a million dollars and 48
months later, the account balance is zero.
(23:23):
That's bad news
because you weren't particularly adeptat what investment choices you made.
The good news is that even thoughyou have violated the later of
five years and age fifty nine anda half, the IRS is playing Mr.
(23:45):
Nice and has basically said, if youcompletely drain an account, your
account ends and you owe nothing.
Nothing additional.
(25:42):
say, for example, you investin a hundred percent VUG.
just,
say that?
just as an example, , and maybeJackie's willing to divulge if she,
If she did something like that, andit has a 50 percent crash, and then
you still got these payments yougot to make, and it's not going to
recover in necessarily five years,that becomes an issue, I would imagine.
(26:06):
And then secondarily, second question,I'm violating the podcast rule
law, is what happens to the money?
Or the plan after your five years,can it revert back a traditional
IRA based on the plan you make?
Let me try and answer that.
One of the privileges.
You retain, and this kicks off in yeartwo of a distribution plan, is that
(26:33):
in any subsequent year during the planwindow, you can switch from amortization.
Which relatively speaking,gave you big distribution
dollars to the minimum method.
And when you do it, itis, you choose to do it.
(26:54):
Once it's a one-way street,you cannot reverse and you
pick a new life expectancy.
So let's say you startedwith half a million.
You made a bad investment choice, it blewup on you, and you only got 200 K left.
Well, you're really,you're facing two issues.
One is how much can I still distribute?
(27:16):
But I think the broader questionis how do I rearrange my life?
And more than likely, maybe yougo back to work in some fashion.
And so you pick the method changeto RM minimum, you pick a new
life expectancy and where you weredistributing 50 grand becomes.
(27:38):
15, 18, 20 grand.
And you might go to a differentallocation in your portfolio
that's not going to be subject to
Well,
you would think so, but obviously taxcode is not going to give you any guidance
nor rules on how you invest your IRA.
But yes, you hold this RMD conversion inyour back pocket and it becomes a valuable
(28:03):
planning tool once you have multiple IRAs.
And furthermore, maybe even let'ssay you're 51 or 52 and you're
looking at an eight year plan.
You could easily have bumps and dipsthat you even know about that are going
to be coming up in your revenue streams.
(28:26):
And so we're going to strategically useRMD conversions at years four and seven.
So to speak
I had never heard of an RMDconversion inside of a SEP plan.
starting, I mean, to illuminatethe complexity of things here.
And you've got to reverse engineer this.
(28:49):
And really have a reverse engineeredplan, knowing all the variables.
And I, for one, would say, no,Jackie did it all on her own.
She's just that kind of DIY person.
I'm the guy that would do it, butI would have it double checked.
For the errors that we'regoing to talk about.
before we get to the errors,what did you invest in,
(29:10):
all right, look, look,
not in, but think I know the answer here.
So Mr. 72T, , he's already outingme because he knows my go to index
fund, which again, I'm not makingany recommendations for anyone
else, but this is what works for me.
My go to stock index fund is BUG.
That is a Vanguard growthfund of domestic stocks.
(29:34):
Okay.
So the way that I did it is.
I don't want to have to switch.
So I kept that in mind as I'mputting together my allocation.
So even though I do VUG,it is not 100 percent VUG.
And again, the amount that I lockedup into this 72 T is only 240, 000.
Okay, my investable assetsis right at 2 million.
(29:55):
So first of all, this is only 10percent of my investable assets.
Okay,
So this has got to last me.
So I have to do this strategically.
I have a brother, Charles,that gets a regular pension.
And I'm like, look, yourcompany set up your pension.
I have to create my own pension, right?
(30:16):
so anyway, so, I have VUG, but it isnot 100 percent in VUG in that account.
Okay.
So I'm very mindful to one, make surethat I have the liquid cash available
when my distributions need to come out.
I don't want them selling anything for me.
I want to manage that.
So I have about, my goal isto keep at least two years
(30:39):
worth of distributions in cash.
So anything else is in VUG.
Now, next year, I want to probably say,okay, let me go ahead and, clip off this,
especially if the market's doing good,that's a good time to reallocate and say,
let me put a little bit, had a good year.
Let me put a little bit more towards cash.
But my goal is to have two yearsNow, first of all, my plan is
(31:01):
only for five years, right?
So that makes a difference.
But my goal is to.
Have it all invested in VUG withthe exception of the fixed amount.
can't even remember if I have itin a like a money market fund with
Schwab or whatever, but it's, fixed.
It's not in the stock market.
That's ready to come out in December.
Right now, we're the first part of 2025and I've already got the money that I
(31:24):
need for the end of 2025 and the next
year.
So that's Yeah, and 26.
So, I've already got it set upwith the intention to always
make sure I have enough liquidfunds to be able to come out.
But the rest is being invested.
So if I had to, I guess, dothe math, it would be roughly,
80 to 90 percent is in VUG.
(31:47):
and the rest is liquid or in amoney market type fixed income.
don't have any bonds in there.
However, many peoplemight want to do that.
But again, everybody'sallocation going to be different.
But the problem you have to solve foris to make sure you have enough cash
to be able to take the distributionswhen you are required to do
so.
So,
that's a very good example, andI appreciate your transparency.
(32:10):
I mean, for me, being moreconservative, if I was to do a five
year plan, I would probably haveall five year distributions in cash.
With that, the return there wouldn'tbe that much different, honestly.
sort of splitting hairs, butthen you've secured yourself.
And you've got a lot ofgrowth on the other end.
And that begs the second question.
You've got a five year plan.
What happens to that IRAat the end of five years?
(32:34):
Mr. 72T, I'm done, right?
Like, I'm not bound to takingout those distributions
that is effectively, yes, a plan.
We know its beginning date.
It's the date of your first distribution.
We know its ending date.
We can compute it in advance.
It's either the day you turnfifty nine and a half, or it's
(32:56):
five years from beginning date.
So, we know the end date.
Day after the end date plan is done
So what's interesting hereis it sounds like what you're
creating is a pre retirement MIGA.
Which you would, create maybeat 70 or 60, lasting 10 years.
Well, what is a MIGA, first of all?
Okay, our listeners, I don't, I barely,I think I know what you're talking about.
(33:19):
Can you please clarifywhat a MIGA is, Bill?
, we got a CPA here, so maybe
I can do that real quickly, butyou're basically paying an insurance
company and it's a formative annuity.
technically, guess I have not
Okay, it's a multi year guaranteedannuity with a fixed interest rate.
Except you pay a fee if you
work with an insurance company
(33:39):
contract
Yeah.
Okay.
There you go.
one in the same.
In a way, it's the same thing,except you're doing it, earlier.
The
I mean, leave it to the insuranceindustry to come out with acronyms.
Right.
You need a visit from an insurancesalesman to explain to you.
Right.
Right.
So,
the internal revenue service.
difference is, in some ways, you'repaying a fee for that, so it's going
(34:02):
to cost you more than the 72T SEP
plan would.
I'm just
trying to think outside of the
essentially essentially what you'redoing with the 72T plan is saying, aha,
it's multi year, it's minimum five,could be more to get to age 59 and a
half, and you are self annuitizing.
(34:23):
Distributions.
You're your own insurancecompany in that context.
Yeah, exactly.
And you're covering a gap.
That you plan on having, just like Jackiedid, she's going to have a gap of five
years till 59 and a half when she, andso you're basically creating income floor
at some level so that you can , make itto your till everything's out of jail.
(34:46):
Yes.
and so, bill, the reason whyI don't like acronyms is just
because it just confuses people.
So I just try to put a little clarityaround exactly what you're talking about.
That's an insurance productthat guarantees you an annual.
Income.
So that's what you're talking about.
The MIGA, some people maynot know what that term is.
I barely know what the term is and wegot a CPA that barely knows what it is.
So now you know what a miga is
(35:06):
I'm not a CFP, but I still,and we're going to have
You know
episode,
and we're going to, and we'regoing to have to have an episode
on annuities too, but want to hearabout the mistakes you can make.
Don't you, Jackie?
Oh God.
I believe I might be inthe hot seat, but yeah.
Mr. 72 T let's talk about themistakes and I pray that I didn't
(35:28):
make any of them, but let's go.
Let's start with who can make a mistake.
First person.
Me.
I'm in the theory business.
I'm in the plan design
to cause distribution streams to occur.
And I'm going to opine to you, essentiallya multi year legal contract that says,
(35:52):
I guarantee this plan is right, right,no surtaxes, no interest, no penalties.
Now, if I make a mistake, and I canbe proud to say I've never made one to
the best of my knowledge in this arena.
That's why I carry errorsand omissions insurance.
(36:12):
And in fact, were I to drop dead tomorrow,that's why my errors and omissions
insurance has a five year, tail on it.
That basically extends mycoverage into the future years.
Even though I'm personally absent,but technically speaking, can
a professional make a mistake?
(36:33):
Of course they can.
You don't want them to, but it happens.
Who's the second partythat can make a mistake?
How about your trustee?
We're going to leave you for last.
Your trust.
You can tell your trustee to do somethingand they don't do it or they do it wrong
(36:55):
or they don't do it in a timely manner.
Or for whatever reason, their computersystem hiccups and makes a mistake.
IRS marches in and says, we don't care.
Your trustee is your subcontractor.
You're responsible for their mistakes.
(37:18):
That's not necessarily a truestatement, but that's where they start.
So again, I mentioned earlier, not onlyare we in the planning business, we're
in the mistake avoidance business.
So how do we avoidmistakes from our trustee?
We do things like keep a year.
(37:41):
Or two, or maybe evenall five years in cash.
So it's always rightthere to be distributed.
Second way we avoid trustee mistakes.
We don't make 12 distributions a year.
We make one.
Now,
whether that one is in January or Juneor September, I don't have opinion,
(38:03):
but you make one distribution ayear from let's say the IRA account.
into an after tax brokerage account,then let's say you want 15, 000 a
year, which is, is that 1, 250 a month?
I'd have to calculate.
It's about
(38:24):
then you say, okay, my life lives monthto month in terms of paying my bills.
That's cool.
Every month, just transfer 1, 200.
And 50 bucks from the aftertaxbrokerage account into your
family expense operating account.
You only made the trusteeresponsible to do one thing, one day.
(38:48):
Jackie, can you automate
Yeah, I automated mine.
So every single year on the samedate, now have to remember to stop the
automatic withdrawals after five years.
But yes, automated my which Mr 72 T,which I think is helpful in avoiding
one of those possible mistakes, whichis not taking the distribution that
(39:09):
you're supposed to automated it.
three, and this is, I believe I'vefaced this one multiple times.
It's a biggie.
Never wait till the last twoweeks of December to instruct
your trustee to do anything.
Much less make an annual distribution.
The reason being half of the wholeentire financial industry of the planet
(39:32):
goes on vacation the last two weeksof the year because of the holidays.
More importantly.
They're still open.
So who got stuck in theoffice answering the phone?
It's the 24 year old, one yearpup who hasn't finished all of
his required educational courses,and you're on the phone with him
(39:56):
saying, I want you to do this.
He's going, huh, huh.
I'll get it done.
And you're going, Oh, you
because I, I might have made thismistake, but let me ask you, since I
set up automatic payments, does thatmaybe give me a better chance of it
just automatically being generated?
Because when I initially did it,it was on the 23rd of December.
(40:18):
And I had it by December 24th.
So I did the online web form and the guythat I was on the phone with, he says,
it's always quicker and easier To do itvia the web form and to make it automatic.
So I think I did make that one of themistakes that you're now mentioning,
like the last two weeks of the year,because mine is the 23rd of December.
(40:39):
So I'm hoping I won't run into an issue,but I have it on my calendar as well.
Like a few days after that to say,let me make sure it's in there.
But hoping that, do you thinkthe automation is helpful
in minimizing that issue?
I don't because it's easierto take a different road.
It's easier to make one distributionsomewhere in the first quarter.
(41:02):
And just say, yeah, I'm done for theyear and worry about monthly cash
flows separately as a non cash eventand a non tax and set plan event.
Because.
You're always asking the question,when you distribute monthly from a
deferred account, the first questionyou always have to be asking is, do
(41:27):
I have free cash equal to or greaterthan the amount of the distribution
logged into the automated system?
So it won't automatically sell yourinvestable assets in order to
It
will not.
Okay.
Well, I just say, sorry,we can't distribute because
you don't have enough cash.
Is that sort of the
In fact, each of thosesystems are different.
(41:49):
I can only speak to one ortwo who will remain unnamed.
Some will just say, I amdistributing nothing because I was
told to distribute X bucks and Xbucks of free cash aren't there.
The next system will say, Well, I've beentold to distribute X, but there's only Y.
They're 1500 bucks short.
(42:10):
I'll distribute everything I got.
And then the next system will do that aswell, but it won't inform you that it you.
Right.
So I think I'm going to look intochanging my annual distribution to like,
We're teaching, we'reteaching the teacher, baby.
I think I'm going to do that.
(42:30):
I just have to be careful to makesure that the other automatic
distributions is erased, whichnormally that's pretty easy to do.
I'll probably see what's in there andmaybe I can click Edit or change, and
I can change it to April because, yeah,having it on December 23rd apparently is
Well,
it sounds like it sounds like youwant to create your 72 T in the first
(42:52):
quarter, have your payment come outin the first quarter, and probably
have five years of cash in there.
So you don't even need to thinkabout selling investments in order
to meet your cash requirements.
Well, can I say something about that?
So Bill, our friend, Eric Cooper, he setup a 72 T and I was chatting with him
back and forth and he said he was kindof, looking at more towards the end of
(43:14):
the year for the first year that you setit up because you don't know how your.
income is going to run.
So that was part of the reasonwhy I was waiting to the end.
I'm sure he didn't mean, the endof December, he's like, well,
be careful because like, for me,I don't have a regular income.
And if I happen to get a nice big chunkfrom a project that I work on, not for
(43:36):
doing this podcast, but for others, but Idon't get nothing for this but let's say
if I had a chunk of money to come in Iwouldn't want to do that at the beginning
of the year and I may only be able toassess that towards the end of the year.
So that's a tricky thing trying tochoose the right time of the year.
(43:57):
You
Well, that's just like
your, that's just like your Rothconversion in the final quarter, but maybe
at the beginning of the last quarter.
So we're getting into the weeds here.
I want to know too Mr. 72T, are thereany other big mistakes that we can make?
Cause we learn from the mistakesand I want to make sure Jackie gets
Yeah.
(44:17):
well, the third person, we didn't talkabout the third party who can make
a mistake, and that's the taxpayer.
Yeah.
I didn't say you made a mistake.
see you wagging your finger at me.
Right.
There are I spend a couple pages on,I call them do's and don'ts, rules
of the road, of distribution plans.
(44:39):
First Early in the year,take care of everything.
Second rule, one transaction per IRA.
third rule is really an avoidance one.
Some people in the planning process,we decided it's a good idea to
have multiple plans running.
And it's an easy jump to say,Oh, it doesn't matter which IRA
(45:05):
I take the distributions from.
It's an enormous issue.
You must keep the one to onecorrespondence of distribution
to IRA balance working.
Never take all distributionsfrom one or two or crisscross
because those are modifications.
a
(45:27):
is, because that's important.
that's where these mistakes lie.
And then we need to talk about thepenalties if you make a modification.
modification, believe itor not, is not defined.
In the Internal Revenue Code,it just says, if you do modify,
bad things are going to happen.
What's a modification?
(45:49):
Intentionally stoppingdistributions is obvious.
Or even missing a quarterlyor annual distribution, both
of which I have seen happen.
Is modification, whether it'sintentional or accidental stuff that
slipped over from between Christmas andNew Year's and doesn't get processed
(46:11):
until January 3rd of the next year.
That's a modification.
So big bucks that were supposedto be distributed weren't or bucks
that weren't were distributed.
Are all modifications.
I suppose the next technical questionis, well, how small can the difference
(46:33):
be that it's not a modification?
To which I give you a two part answer.
First part, don't go there.
Second part, 25 bucks.
I don't think anybody is interested,including the Internal Revenue Service,
of penalizing taxpayers for what istantamount to or close to rounding errors.
Thank you very much.
(46:53):
But anything above that becomes suspectto being, quote, a modification,
and the answer is real simple.
Don't go there
right.
So on the point of modifications, I wantedto clarify this because again keying
in on your practical, sensible stuffthat you should be doing, I know that
technically using a 401k versus an IRA.
(47:13):
Should we stay away from tryingto use a 401k to do these 72Ts?
well, obviously unless you'reusing exception number five, which
is the separation of service atage 55, Let's put that one aside.
I would always transferfrom the plan 401k.
How about a 403b?
How about a 401a?
(47:34):
is
the list of plans just goes on forever.
Get it all into an IRA first.
The reason being is you have justremoved yourself from being beneath
the employer sponsor umbrella.
And number two, this is a two parter.
(47:55):
When you go to one of thebig guys, all sell the same
products, all 10, 000 of them.
Basically, there's a great big tablein the sky and they all have the same
table and a little check mark nextto it saying, can this transaction
be purchased by an IRA account?
(48:16):
Yes or no.
And they will only let youpurchase eligible investments.
And if it's not eligible,you can't have it.
it's an
on or off switch.
It creates a much broader universe.
Of investment opportunities to you.
Now, some people can thinkof that as an advantage.
(48:37):
Other people look at it and go, Oh my God,
Yeah.
it's a burden.
So
food for thought.
Yeah,
But then there's some versions of thoseexceptions that can't use the IRA.
So you have to pay attentionto that column as well.
This is a fascinating topic becauseit gets into so many different
nuances, but they're powerful.
(48:59):
This is a powerful tool.
Jackie used and that you can useto establish goals of getting to 59
and a half or a little bit beyond.
But if you stick to what we'vetalked about today, it becomes easy.
I think this has been a comprehensive,deep dive into 72T, in particular
(49:25):
exception for the SEP rules.
What do you think, Jackie?
absolutely.
And I knew we had to have the rightperson to have this discussion.
So I wasn't even willing to engage in itwithout having someone like Mr. 72T here,
Bill Stecker, because he's done so many.
His whole business isaround early withdrawals.
(49:46):
72 T's.
He's written private letterrulings and things like that.
He has written this guide and thathe's offering absolutely free on
his website and the title of it is apractical, the keyword is practical
guide to substantially equal periodicpayment and the IRS code 72 T.
He's on the 5th edition of that.
(50:07):
So this guy's knows his stuff whenit comes to setting up a 72 T.
I actually did it myself.
He was probably one of the best resources.
He answered all of my questions.
And he's done this forso many other people.
so Bill, we appreciate you havingthis source on your website.
Now we talked about this.
I want to make sure ouraudience understands.
So you have a place to put in youremail in order to get the guide.
(50:30):
And typically people use it as alead magnet, marketing or whatever.
You're not using itfor that reason at all.
So you collect theemail addresses for what
Well, I collect your name and your email.
Just arguably for the, I suppose,my own personal interest of how
many people are getting copiesof the guide I make a promise.
(50:50):
I would never sell.
Or reuse in any fashion, anyone'sname or email, you get the guide.
And my issue is I viewmyself as a gatekeeper.
It's my job, not yours to keep trackof honestly, what Congress and the
(51:13):
internal revenue service are up to.
and so that when they make a changeeither in an IRS pronouncement or
Congress adds another couple ofparagraphs to code section 72 T, one, I
know about it, two, I can let you knowand I can also in certain cases offer
(51:37):
my opinion as to whether they've donesomething good or stubbed their toe
Well, that begs an interesting question,for the future, in order to flex this plan
as a lever, what would you like to see?
What would you want Congress to do?
to be blunt about it.
Remove code section 72 T in its entirety.
(51:58):
Just get rid of it.
I believe it to be government overwatch,almost bordering on inappropriate.
I mean, there's a school of thinking towhich I do subscribe, which basically
says this money in this IRA account.
Or Roth IRA or 401k or 403b.
(52:19):
I don't care where it is.
It's my money.
It's not yours.
I'm fully vested.
So there's no forfeiture.
And if it's mine, and did you offerme an advantage in earlier decades
by not taxing the gains in those.
(52:41):
Earlier 20s, 30s, 40s,whatever time period.
Yeah, you did.
And so, are you due your just due?
When I start making withdrawals,is it appropriate that it be
treated as ordinary income?
Yeah, I'm willing to accede that.
I'm not asking for a gift.
But, I'm also asking that yourecognize this money is mine.
(53:04):
It was always mine.
It was never yours.
And that when I decide to withdrawit, I write you a tax check.
End of conversation.
I love it.
Yeah,
absolutely
if that puts me out ofbusiness, I'm happy.
I've never heard this comment before.
I think you're absolutely right.
they hold us hostage till 59.
(53:25):
5, except for these exceptionrules, which are complicated and
sometimes difficult to navigate.
Why not get rid of the rule, but theymight be promoting early retirement.
there would be less workforce.
It might run the economya little differently.
There might be less return or less GDP.
And so I completely agree withyou for the fire movement.
(53:46):
That would be awesome forthe people that get it right.
And for the people that needthe money sooner, because
they burn out and they can't.
do this or, in that capacitywith this particular job anymore,
would be ultimate flexibility.
Just like Jackie, when we had theHSA episode, we said everybody
should have access to an HSA.
(54:07):
Yeah, yeah.
So, you're saying we wish there was noneed for the 72 T and let's just open it
up to say there is no 10 percent penaltyfor early withdrawal or even if they
wanted to split the baby and say, okay,come up with an earlier number because
I hate that they're trying to ration youin the beginning, you know, saying you
can't start to 59 and a half, but waita minute, we're going to make you take
(54:29):
it after 75 or whatever that number is.
I hate the, let me tell youwhat to do and when to do it.
people don't remember, butthat's the way it used to be.
We got IRAs and 401k plans of varyingversions from the late 70s through 1985.
(54:51):
And the real issue was, backthen, they were no big deal.
How could you have amillion dollar IRA in 1980?
was a mathematical impossibility.
And so, back in the late 70s, early80s, All of these deferred defined
contribution account types were like Isaid, no big deal, no big bucks involved.
(55:17):
I'm sorry to report the lastnumber I saw, this was a 22.
trillion dollar issue.
And so it's not until 1986, we getthe tax reform act of 1986, which is
the first enactment of code section 72T, which says I'm going to surtax you
(55:42):
because it started becoming important.
It was just going up that curveof how many bucks are involved.
And Congress said.
I want some.
Yeah.
Sorry for deviating from thepracticalities of 72t plans to,
(56:03):
maybe my political persuasions,which is what they are.
But, like I said, I'min this land every day.
And I'll say it this way.
I'd be happy if I was out of business.
Yeah, that is a great way to end it.
You are so great at what you do.
I'm so glad that I found you andyou didn't think I was a stalker,
(56:24):
but you responded and we talkedquite a bit before we got you on.
So Bill, we've had a history lesson.
Okay.
We've had a math and financial lesson.
And we had a retirement and taxstrategy lesson in this whole episode.
So I know you've helped a lot of people.
This was with an expert that knowswhat he's doing, a CPA that's been
(56:46):
practicing for four decades at least.
That is providing so muchfree stuff on his website,
which is 72 t calc, CAL c.com.
I'll put it in the show notes.
And he gives away this free bookthat's now in its fifth edition.
To allow you to go through everything.
There was some nuancedquestions that I had.
(57:07):
It answered those questions whenI was finding it nowhere else.
so Bill Stecker, where can people findyou if they want to connect with you?
Find out more.
We've got your website, but isthere any other way people can
contact you if they wanted to?
Sure.
You've mentioned thewebsite multiple times.
Thank you for that.
(57:28):
Have your pencil ready?
You want to give me a call?
My phone number is area code312-361-0221 that is a downtown
Chicago phone number, but guess what?
It rings in Colorado.
So
Yeah, you got two different residents
well,
I will always answer my business line.
(57:51):
what is the name of your business?
The name of my business is also myemail, which is the marble group,
just like it sounds T H E. Marblelike the stone group at, and I use a
mountain provider because we don'thave cable up here because it's kind
(58:11):
of hard to dig trenches through rocks.
they're called whispertel, W I SP as in Peter E R T E L dot net.
They are the mountain internetservice provider of note for.
Montana, Wyoming, Utah, Colorado,Arizona, New Mexico, et cetera.
(58:37):
okay.
So
Jackie, we're coming up on two hours.
Anybody that has made itthrough these two hours is now
an expert
they are, they are, and I will put allof your contact information in the show
Sure.
you won't find them on socialmedia or anything like that.
This is the only
don't, I'm too old for that.
I'm sorry.
(58:57):
Oh, don't say that.
well, remember, this isBill's first podcast.
And I think I think he hasdone an outstanding job.
I hope this is not his last podcast.
I want his website to spike in peoplethat are curious, see his email list
grow, because learning about the72T, you learn about how to plan
(59:23):
your life backstop on accessing moneythat is yours, And we heard it here
first, blow it up, blow up 72 T'sso that we have access to our money.
love it.
I love everything about this episode.
I was wondering where this was goingto go because I thought it was a weeds
issue, but this is a much bigger issue.
(59:45):
And I thank you, Bill, for joiningus today on catching up to FI.
Absolutely.
My pleasure.
And I hope that a number of yourlisteners, viewers get knowledge
base out of this to at leastbe able to understand that.
Knowledge is power.
And so whatever decisions Imake become better decisions,
(01:00:09):
the more knowledge I've got,
Well said, and we will catch younext time on catching up to fi.
Okay, so last week we had an illuminatingconversation with Bill Stacker, owner
of the website, 72 calc.com, but he'sa CPA and an absolute genius when it
comes to early retirement strategiesand specifically the 72 T. Well, we
were really getting into the nittygritty, so we had to continue our
(00:22):
conversation with him, right, bill?
I mean, he is a savant.
He is a genius.
we could talk to himfor hours, and we did.
So even after this episode,it was just plain fun.
I never thought talkingtax code would be so much.
Fun, so before you listen tothis episode, you really gotta do
(00:43):
yourself a favor and go back tolast week's episode, part one of Mr.
72 T.
I think I did something right.
So I didn't realize that the amortizationmethod was like the one that just
makes the most sense for most people.
Because when I was doing it, it allowedme to segregate the smallest amount
(01:07):
of money in a separate IRA that wouldgive me the most monthly amount.
I was looking for 15, 000a year for five years.
And using the amortizationmethod I only had to lock up, I
think, 240, 000 worth of my IRA.
when I found your website, you madethat crystal clear and I'm like, okay,
(01:29):
everything he said made so much sense.
I wish I would have uncovered thissooner because I kept bouncing
between the methods and just wasn'tclicking and then you made it.
Crystal clear.
essentially what you're doing withthe 72T plan is saying, aha, it's
multi year, it's minimum five,could be more to get to age 59 and a
(01:52):
half, and you are self annuitizing.
Distributions.
You're your own insurancecompany in that context.
Yeah, exactly.
And you're covering a gap.
That you plan on having, just like Jackiedid, she's going to have a gap of five
years till 59 and a half when she, andso you're basically creating income floor
(02:14):
at some level so that you can , make itto your till everything's out of jail.
who can make a mistake.
First person.
Me.
I'm in the theory business.
I'm in the plan design to causedistribution streams to occur.
And I'm going to opine to you, essentiallya multi year legal contract that says,
(02:41):
I guarantee this plan is right, right,no surtaxes, no interest, no penalties.
Now, if I make a mistake, and I canbe proud to say I've never made one to
the best of my knowledge in this arena.
That's why I carry errorsand omissions insurance.
(03:32):
We need to talk today about also there'sthree different methods of calculating
Your 72 T SEP payments, so to speak.
Can you go through those and tell uswhich might be the most popular and
the most valid to help us be flexible?
Okay.
if you read all of the popularliterature, everything will start by
(03:55):
telling you there are three methods andthey are amortization, Annuitization
is number two, and what's calledminimum method is number three.
Now, I will tell you that, well,let's get practical for a moment.
let's pick a method, but let'stest it to see if it's of any use.
(04:20):
And those tests might bemaximizes my distribution dollars.
Per amount of IRA dollars devoted tothe plan, I think that's number one.
And for that matter, that's kind of numbertwo and number three on the list of what
(04:40):
makes for a good computational methodologyin that context, the amortization method.
Is the only one that works.
Everything else is an also ran.
Don't bother.
And amortization requires three variables.
(05:01):
We talked about it before.
An account balance.
Life expectancy and an interest rate andthe math is the, PMT function in Excel.
And it is for all intents and purposes.
It is the same math that your banker usestoday to compute your mortgage payment.
Yep.
And annuitization,
if you want to know why it fails.
(05:23):
I've got a couple of page rightup about from some actuaries
that tells you why it fails.
It just always gives you a smaller number.
Minimum method fails.
Because, again, for two reasons.
One, the minimum methoddoesn't use an interest rate.
So, guess what?
You put the same factors in amortization,put zero in the interest rate, and
(05:48):
you get the minimum method number.
And so, say to yourself, Well,gee, I have, 800, 000 in my IRA.
I would like 50, 000 a year.
As, because that's what theamortization formula tells you.
And then you jump over to theminimum method, and it says,
well, you could have 25, 000.
(06:08):
Don't you just kind of go,no, I'm not interested.
I know what the literature says.
The reality is, it's amortization,
thank you for that.
So I think I did something right.
So I didn't realize that the amortizationmethod was like the one that just
makes the most sense for most people.
Because when I was doing it, it allowedme to segregate the smallest amount
(06:33):
of money in a separate IRA that wouldgive me the most monthly amount.
I was looking for 15, 000a year for five years.
And using the amortizationmethod I only had to lock up, I
think, 240, 000 worth of my IRA.
when I found your website, you madethat crystal clear and I'm like, okay,
(06:55):
everything he said made so much sense.
I wish I would have uncovered thissooner because I kept bouncing
between the methods and just wasn'tclicking and then you made it.
Crystal clear.
so you need to choose the method.
Okay.
What are the other piece?
You mentioned the otherpieces of information.
Can you sort of list out the other twoor three pieces of information that you
(07:15):
need in order to do the calculation?
And you do have a calculatoron your website, by the way.
That's very helpful.
Are you talking aboutoperands in the math?
Well so you, got a greatcalculator that does all of that.
But before someone starts tosay, let me figure this out.
What other pieces of informationlike you mentioned an interest
rate, what are the other, I guess,
(07:36):
Okay,
of information?
obviously getting anaccount balance is easy.
often than not, you look it uponline and boom, there it is.
The second piece of informationis an interest rate.
And what the IRS tells us is you can use.
Up to, so this is going to be aceiling, 120 percent of the midterm
(08:01):
applicable federal rates from eitherof the two months preceding the
month of the first distribution.
What a mouthful.
I know.
It's awful, but kind ofa two edged sword here.
It's easy.
To look up federal rates, they'reall over the place on the internet.
(08:22):
and you can actually look at the monthlyrevenue rulings coming out from irs.
gov to say, and it'sright there in the chart.
For example, the current rate is 5.
43%, which will be, you canfirst use in March of 2025.
(08:43):
Okay, so you got to go grab that ratefirst now in the latest Revenue notice
which came out in 2022 the IRS actuallygave us also a floor rate for the first
time Which is 5 percent which meansEven if the midterm applicable federal
(09:07):
rates are all in the fours and lower,which they had been for a decade of
the, say, 2010 to 2020, you just use 5%.
So you got a floor at 5 percent andit's at the moment growing higher.
(09:27):
What's the April rate, the Mayrate, June rate going to be?
I don't have a clue.
I stopped guessing long ago.
It's probably going to be in that range.
And the amortization formula issensitive to that interest rate.
you can go to my calculator.
(09:48):
You can use, like I say, the PMTfunction in Excel, you'll get radically
different distribution amountsas you change the interest rate.
So what's interesting to me here, and wetalked about the 4 percent rule being
a safe withdrawal rate, and you'retalking about 5 percent and portfolio
construction within your IRA from whichyou take your distributions according
(10:11):
to the SEP rule becomes important too,
right?
Well, there's a coupleof things that work here.
Whole bunches of well learnedmathematicians, way smarter than me, have
figured out this safe withdrawal question.
And they seem to coalesce in
(10:32):
the neighborhood of 4 to 5%.
And so what is the safe withdrawal rate?
Safe withdrawal rate istheoretically meant to be that
amount indexed for inflation overusually 30 years to basically
solve the question or the dilemma.
(10:54):
How do I ensure that I goprone with five bucks left?
As opposed to being vertical and brokein terms of a distribution stream.
That's a totally different, towhich by the way I subscribe.
Whether you listen to Bill Bengen, whoyou had on earlier, or whether you read
(11:17):
the Trinity study from the late 1990s, youget all of those same kinds of answers.
Conversely, here we're justwrestling with a five year tax issue.
And so, even though you might have 800,000 in your IRA today, and my math says
(11:38):
you can take 50K, which is about 6.
2%, I think that's okay because allwe're talking about is five years.
We're not talking about 30.
or
40 years.
that's the critical differenceso people understand they're not
going to deplete their portfolio.
they can segregate it, right?
well, also new sources of income are goingto start kicking in such as you might
(12:01):
be lucky enough that you've got definedbenefit pension that might be kicking
in and, or you're in a public servicefunction that still might have a pension.
Social security, socialsecurity will still be there.
Take it to the bank.
Now, when can you startreceiving full benefits?
(12:25):
That, we already know, thatone, that guy's moving.
Aren't we at 66 years and 10 months old?
I
don't know when it goes to 67.
It either just did or
if,
yeah, I think if anyone hits it like2025, maybe 2026, it catches everybody
(12:46):
at that point where it's now 67.
And you're right, it will change theway it looks will likely change
or the year that you can take it.
However, Social security isgoing to be there in some form or
fashion.
So basically, there is a higher,quote unquote, safe withdrawal rate
because we're time limited, generally.
you can stretch your time out 10 years,though, and you got to be a little bit
(13:08):
more careful, I would imagine, becausepeople would be worried they don't
want to deplete their SEP portfolio.
And as a tangible example, Jackie,are you willing to share with us
what you did in order to createthis plan and what you invested in
and how you came to your number?
Yeah.
So I started out and again, I did havesome brokerage money that kind of ran
(13:32):
out and I didn't want to use it all.
And I was starting to use myRoth contributions and I'm like,
okay, I should want my Roth.
account to grow more, right?
Because when I take thatmoney out, it's tax free.
So I'm like, why am I doing this?
Let me go ahead and do a 72T.
So I had just turned 55 at thetime I decided to do this, but
I was thinking about doing itfor years ever since I retired.
(13:52):
Okay.
So The amount that I needed becauseI didn't want too much coming out
because I do get subsidies formy health insurance and things
like that, because I'm on the A.
C. A. And so the amount I cameup with was 15, 000 a year.
Okay.
That's how much I want it.
So I backed into it.
So I used, as Mr 72 T was saying, I usedthat number plugged into a calculator
(14:15):
and Bill, maybe you can clarify this.
I use the amortizationmethod as you suggest.
I believe I had to put in my age andsomething about my life expectancy.
I had to check that table.
So I'll put that number in there.
And it came up with roughly 240, 000.
Now I had already had, and Bill, Igot a bunch of different IRAs.
(14:36):
So I already had an IRAthat was roughly that.
So I used that IRA.
It was Schwab and I called up Schwab.
Because somebody had told methey had to fill out this form
and they had to go in person.
You don't have to do all that.
So I did all my stuff online and Icalled Schwab expecting to get someone
that has no idea what a 72 T is, buthe did know and he was very helpful and
(14:58):
really at that point, I already did allthe hard stuff as you were explaining.
I did the planning.
I ran the numbers and all I neededfrom him was how do I set up
these equally Annual withdrawals.
I want it to set it up annually.
You could set it upmonthly if you want to.
So basically it's an online form.
You do it like you doany other withdrawal.
(15:19):
And I said, was almost likeautomating this whole thing
as far as the payments go.
So I said, every.
December 1st, I want 15, 000 dollars orwhatever that exact number was paid out
to me into this account and I was done.
Right.
Actually, you just touchedon three new issues.
(15:41):
Okay.
Oh gosh.
One is I remember I said youhave to pick a life expectancy.
Correct.
And I did.
I had to
There's three permissiblelife expectancies.
There's what's called single.
If you're married, you canalso use joint and several.
Okay.
and if you're, you can alsouse what is called uniform.
(16:03):
Which is nothing, it's uniform lifeexpectancy is identical to joint several
life expectancies with an assumption thatyour surviving spouse is 10 years younger.
Okay.
so I'm single, I'm married.
So went with the single,
Right now of those three numbers haveto go back in history If we look back
(16:25):
to last century, quote unquote, theWild Wild West days of 72T plans, ask
five actuaries for a life expectancytable and you would get nine answers.
another
confusing
thing.
they were all over the place.
Finally, in 2002, the IRSsaid enough of this nonsense.
(16:45):
One table, and then, which is the singletable, and then the JNS and the uniform
tables are simply derivative tables.
and it's always the single tablethat gives you the smallest number,
which in that math formula givesyou the biggest annual distribution.
(17:05):
so a lot of this stuff with the72 T have become a lot easier.
I remember right after I retired,when I was looking at this
stuff, was overwhelming to me.
And then as time went on, Isaid, well, let me revisit, it.
And then there was these changesthat you have already talked about
that just made it less intimidating.
So I'm hoping that if anyone hasconsidered this or is considering
(17:25):
this, give it another look betweenthis episode, your guide that you
offer for free on your website.
It makes it much easier.
There's calculators out there.
You've got one on your website.
Dinky town.
net has a great one andthere's a couple other ones.
So, bill yacht to your,Answer to your question.
That's how I did mine.
And I felt much better doing it,especially after I found this 72
(17:50):
T Calc website and the guide I hadall kinds of crazy question and he
answered every single one of them.
So it was good.
Okay, Bill, what you got?
So, Mr. 72T, you mentionedtwo more things that she
I brought
the next two.
One is just so people are aware.
sidelight really.
When you start these distributions,some financial institution is
(18:13):
going to issue you a document.
It's called a 1099 R. The R standsfor retirement distributions.
And they will only issue one1099R per distributions per IRA.
So you talked earlier about takingmoney once a year versus once
a quarter versus once a month.
(18:36):
The internal revenue service has nopurview to look at your transactional
history within or on an intra year basis.
They can't.
that's why Schwab, in your case,Fidelity for somebody else, issues
one document per year, which is thesum of all distributions from the IRA.
(19:01):
How you actually distribute is yourbusiness and your business only.
so you're saying so I could go in andI could switch my automatic withdrawals
to monthly or quarterly as long as itstill equals that exact annual amount.
is correct.
Okay,
I don't
necessarily recommend it.
But what you just said is true.
The third issue I want to bring up isin every case, you've got a financial
(19:26):
institution, usually a biggie.
And you think that they are yourtrustee and your custodian and they are.
And you think, well, whatdoes my trustee owe me?
And the answer is.
Wait a minute.
Stop the bus.
Back up three stops.
They're a bank.
(19:48):
First banker's rule.
Keep the money.
Second banker's rule.
Protect all of myself and my money.
Meaning, they take a blindeye to your 72 T plans.
They don't care that it is a substantiallyequal periodic payment or that you're
(20:10):
doing it from the separate service atage 55 or age 50, because I used to work
for the NYPD, they don't care, they sayto themselves, we know your name, we
know your address, we know your date ofbirth and we know your account balance.
And we know you took bucks out.
(20:32):
Therefore, I'm going to giveyou a 1099 R, that's the law.
Now it's your job as the taxpayerto complete what's called form 5329.
It's another, pardon me, busy IRSform, but you got to do it, which
(20:52):
basically says.
Yeah, I took an early distribution,and here's my reasons, because it
could be more than one, for havingtaken the distribution, and it is a
qualified reason, so the 10 percentsurtax plus interest does not apply.
(21:13):
IRS, listen to me, don'tlisten to my trustee.
He was not doing me any favors.
Yeah, that's really important.
And just to stress your point, I have madeother withdrawals like from my Roth IRA.
It's the same exact form and I haveto tell them what was my reason.
(21:34):
And my reason I am taking out thecontribution portion which they ask
me, how much is your total IRAs?
How much did you takeout so far to determine?
Oh, yes, she is actually stilltaking out the contribution portion.
I get the same and I already got my form.
I get the same exact form, exceptthe reason for that is different.
(21:54):
And you're right.
It's a question between me as a taxpayer.
And my taxes in the IRS, notnecessarily the custodian.
If anything, they wantto be held harmless.
I'm
Yeah.
Well, They do not want to be ever accusedof being in the tax advice business.
That's the whole issue.
so, it brings up a couple of pointsand we're going to have to talk in a
(22:15):
minute about mistakes you can make.
But for me, it's smart that Jackie doesit on September 1st and in one payment.
That's probably the easiest way todo it because remember that your
custodian can dilly dally and take time.
To issue the payment, and if you doit after December 20th, you could get
screwed with a mistake where it endsup being issued in the first part of
(22:37):
January, then totaling up all your things.
If you do it monthly, you've got tomake sure that it's exact and within
a dollar, as you say your book,but a couple of questions here for
me Jackie, what do you invest in?
and the reason I ask is because,You Say you deplete this thing
before five years what happens then?
(23:01):
Okay.
Well, I guess I need Mr. 72T to answer that question.
So if I deplete it the four orfive years or before I turned
59 and a half, what happens
Well, there's good newsand there's bad news.
The bad news is four years ago, youstarted with half a million dollars and 48
months later, the account balance is zero.
(23:23):
That's bad news
because you weren't particularly adeptat what investment choices you made.
The good news is that even thoughyou have violated the later of
five years and age fifty nine anda half, the IRS is playing Mr.
(23:45):
Nice and has basically said, if youcompletely drain an account, your
account ends and you owe nothing.
Nothing additional.
(25:42):
say, for example, you investin a hundred percent VUG.
just,
say that?
just as an example, , and maybeJackie's willing to divulge if she,
If she did something like that, andit has a 50 percent crash, and then
you still got these payments yougot to make, and it's not going to
recover in necessarily five years,that becomes an issue, I would imagine.
(26:06):
And then secondarily, second question,I'm violating the podcast rule
law, is what happens to the money?
Or the plan after your five years,can it revert back a traditional
IRA based on the plan you make?
Let me try and answer that.
One of the privileges.
You retain, and this kicks off in yeartwo of a distribution plan, is that
(26:33):
in any subsequent year during the planwindow, you can switch from amortization.
Which relatively speaking,gave you big distribution
dollars to the minimum method.
And when you do it, itis, you choose to do it.
(26:54):
Once it's a one-way street,you cannot reverse and you
pick a new life expectancy.
So let's say you startedwith half a million.
You made a bad investment choice, it blewup on you, and you only got 200 K left.
Well, you're really,you're facing two issues.
One is how much can I still distribute?
(27:16):
But I think the broader questionis how do I rearrange my life?
And more than likely, maybe yougo back to work in some fashion.
And so you pick the method changeto RM minimum, you pick a new
life expectancy and where you weredistributing 50 grand becomes.
(27:38):
15, 18, 20 grand.
And you might go to a differentallocation in your portfolio
that's not going to be subject to
Well,
you would think so, but obviously taxcode is not going to give you any guidance
nor rules on how you invest your IRA.
But yes, you hold this RMD conversion inyour back pocket and it becomes a valuable
(28:03):
planning tool once you have multiple IRAs.
And furthermore, maybe even let'ssay you're 51 or 52 and you're
looking at an eight year plan.
You could easily have bumps and dipsthat you even know about that are going
to be coming up in your revenue streams.
(28:26):
And so we're going to strategically useRMD conversions at years four and seven.
So to speak
I had never heard of an RMDconversion inside of a SEP plan.
starting, I mean, to illuminatethe complexity of things here.
And you've got to reverse engineer this.
(28:49):
And really have a reverse engineeredplan, knowing all the variables.
And I, for one, would say, no,Jackie did it all on her own.
She's just that kind of DIY person.
I'm the guy that would do it, butI would have it double checked.
For the errors that we'regoing to talk about.
before we get to the errors,what did you invest in,
(29:10):
all right, look, look,
not in, but think I know the answer here.
So Mr. 72T, , he's already outingme because he knows my go to index
fund, which again, I'm not makingany recommendations for anyone
else, but this is what works for me.
My go to stock index fund is BUG.
That is a Vanguard growthfund of domestic stocks.
(29:34):
Okay.
So the way that I did it is.
I don't want to have to switch.
So I kept that in mind as I'mputting together my allocation.
So even though I do VUG,it is not 100 percent VUG.
And again, the amount that I lockedup into this 72 T is only 240, 000.
Okay, my investable assetsis right at 2 million.
(29:55):
So first of all, this is only 10percent of my investable assets.
Okay,
So this has got to last me.
So I have to do this strategically.
I have a brother, Charles,that gets a regular pension.
And I'm like, look, yourcompany set up your pension.
I have to create my own pension, right?
(30:16):
so anyway, so, I have VUG, but it isnot 100 percent in VUG in that account.
Okay.
So I'm very mindful to one, make surethat I have the liquid cash available
when my distributions need to come out.
I don't want them selling anything for me.
I want to manage that.
So I have about, my goal isto keep at least two years
(30:39):
worth of distributions in cash.
So anything else is in VUG.
Now, next year, I want to probably say,okay, let me go ahead and, clip off this,
especially if the market's doing good,that's a good time to reallocate and say,
let me put a little bit, had a good year.
Let me put a little bit more towards cash.
But my goal is to have two yearsNow, first of all, my plan is
(31:01):
only for five years, right?
So that makes a difference.
But my goal is to.
Have it all invested in VUG withthe exception of the fixed amount.
can't even remember if I have itin a like a money market fund with
Schwab or whatever, but it's, fixed.
It's not in the stock market.
That's ready to come out in December.
Right now, we're the first part of 2025and I've already got the money that I
(31:24):
need for the end of 2025 and the next
year.
So that's Yeah, and 26.
So, I've already got it set upwith the intention to always
make sure I have enough liquidfunds to be able to come out.
But the rest is being invested.
So if I had to, I guess, dothe math, it would be roughly,
80 to 90 percent is in VUG.
(31:47):
and the rest is liquid or in amoney market type fixed income.
don't have any bonds in there.
However, many peoplemight want to do that.
But again, everybody'sallocation going to be different.
But the problem you have to solve foris to make sure you have enough cash
to be able to take the distributionswhen you are required to do
so.
So,
that's a very good example, andI appreciate your transparency.
(32:10):
I mean, for me, being moreconservative, if I was to do a five
year plan, I would probably haveall five year distributions in cash.
With that, the return there wouldn'tbe that much different, honestly.
sort of splitting hairs, butthen you've secured yourself.
And you've got a lot ofgrowth on the other end.
And that begs the second question.
You've got a five year plan.
What happens to that IRAat the end of five years?
(32:34):
Mr. 72T, I'm done, right?
Like, I'm not bound to takingout those distributions
that is effectively, yes, a plan.
We know its beginning date.
It's the date of your first distribution.
We know its ending date.
We can compute it in advance.
It's either the day you turnfifty nine and a half, or it's
(32:56):
five years from beginning date.
So, we know the end date.
Day after the end date plan is done
So what's interesting hereis it sounds like what you're
creating is a pre retirement MIGA.
Which you would, create maybeat 70 or 60, lasting 10 years.
Well, what is a MIGA, first of all?
Okay, our listeners, I don't, I barely,I think I know what you're talking about.
(33:19):
Can you please clarifywhat a MIGA is, Bill?
, we got a CPA here, so maybe
I can do that real quickly, butyou're basically paying an insurance
company and it's a formative annuity.
technically, guess I have not
Okay, it's a multi year guaranteedannuity with a fixed interest rate.
Except you pay a fee if you
work with an insurance company
(33:39):
contract
Yeah.
Okay.
There you go.
one in the same.
In a way, it's the same thing,except you're doing it, earlier.
The
I mean, leave it to the insuranceindustry to come out with acronyms.
Right.
You need a visit from an insurancesalesman to explain to you.
Right.
Right.
So,
the internal revenue service.
difference is, in some ways, you'repaying a fee for that, so it's going
(34:02):
to cost you more than the 72T SEP
plan would.
I'm just
trying to think outside of the
essentially essentially what you'redoing with the 72T plan is saying, aha,
it's multi year, it's minimum five,could be more to get to age 59 and a
half, and you are self annuitizing.
(34:23):
Distributions.
You're your own insurancecompany in that context.
Yeah, exactly.
And you're covering a gap.
That you plan on having, just like Jackiedid, she's going to have a gap of five
years till 59 and a half when she, andso you're basically creating income floor
at some level so that you can , make itto your till everything's out of jail.
(34:46):
Yes.
and so, bill, the reason whyI don't like acronyms is just
because it just confuses people.
So I just try to put a little clarityaround exactly what you're talking about.
That's an insurance productthat guarantees you an annual.
Income.
So that's what you're talking about.
The MIGA, some people maynot know what that term is.
I barely know what the term is and wegot a CPA that barely knows what it is.
So now you know what a miga is
(35:06):
I'm not a CFP, but I still,and we're going to have
You know
episode,
and we're going to, and we'regoing to have to have an episode
on annuities too, but want to hearabout the mistakes you can make.
Don't you, Jackie?
Oh God.
I believe I might be inthe hot seat, but yeah.
Mr. 72 T let's talk about themistakes and I pray that I didn't
(35:28):
make any of them, but let's go.
Let's start with who can make a mistake.
First person.
Me.
I'm in the theory business.
I'm in the plan design
to cause distribution streams to occur.
And I'm going to opine to you, essentiallya multi year legal contract that says,
(35:52):
I guarantee this plan is right, right,no surtaxes, no interest, no penalties.
Now, if I make a mistake, and I canbe proud to say I've never made one to
the best of my knowledge in this arena.
That's why I carry errorsand omissions insurance.
(36:12):
And in fact, were I to drop dead tomorrow,that's why my errors and omissions
insurance has a five year, tail on it.
That basically extends mycoverage into the future years.
Even though I'm personally absent,but technically speaking, can
a professional make a mistake?
(36:33):
Of course they can.
You don't want them to, but it happens.
Who's the second partythat can make a mistake?
How about your trustee?
We're going to leave you for last.
Your trust.
You can tell your trustee to do somethingand they don't do it or they do it wrong
(36:55):
or they don't do it in a timely manner.
Or for whatever reason, their computersystem hiccups and makes a mistake.
IRS marches in and says, we don't care.
Your trustee is your subcontractor.
You're responsible for their mistakes.
(37:18):
That's not necessarily a truestatement, but that's where they start.
So again, I mentioned earlier, not onlyare we in the planning business, we're
in the mistake avoidance business.
So how do we avoidmistakes from our trustee?
We do things like keep a year.
(37:41):
Or two, or maybe evenall five years in cash.
So it's always rightthere to be distributed.
Second way we avoid trustee mistakes.
We don't make 12 distributions a year.
We make one.
Now,
whether that one is in January or Juneor September, I don't have opinion,
(38:03):
but you make one distribution ayear from let's say the IRA account.
into an after tax brokerage account,then let's say you want 15, 000 a
year, which is, is that 1, 250 a month?
I'd have to calculate.
It's about
(38:24):
then you say, okay, my life lives monthto month in terms of paying my bills.
That's cool.
Every month, just transfer 1, 200.
And 50 bucks from the aftertaxbrokerage account into your
family expense operating account.
You only made the trusteeresponsible to do one thing, one day.
(38:48):
Jackie, can you automate
Yeah, I automated mine.
So every single year on the samedate, now have to remember to stop the
automatic withdrawals after five years.
But yes, automated my which Mr 72 T,which I think is helpful in avoiding
one of those possible mistakes, whichis not taking the distribution that
(39:09):
you're supposed to automated it.
three, and this is, I believe I'vefaced this one multiple times.
It's a biggie.
Never wait till the last twoweeks of December to instruct
your trustee to do anything.
Much less make an annual distribution.
The reason being half of the wholeentire financial industry of the planet
(39:32):
goes on vacation the last two weeksof the year because of the holidays.
More importantly.
They're still open.
So who got stuck in theoffice answering the phone?
It's the 24 year old, one yearpup who hasn't finished all of
his required educational courses,and you're on the phone with him
(39:56):
saying, I want you to do this.
He's going, huh, huh.
I'll get it done.
And you're going, Oh, you
because I, I might have made thismistake, but let me ask you, since I
set up automatic payments, does thatmaybe give me a better chance of it
just automatically being generated?
Because when I initially did it,it was on the 23rd of December.
(40:18):
And I had it by December 24th.
So I did the online web form and the guythat I was on the phone with, he says,
it's always quicker and easier To do itvia the web form and to make it automatic.
So I think I did make that one of themistakes that you're now mentioning,
like the last two weeks of the year,because mine is the 23rd of December.
(40:39):
So I'm hoping I won't run into an issue,but I have it on my calendar as well.
Like a few days after that to say,let me make sure it's in there.
But hoping that, do you thinkthe automation is helpful
in minimizing that issue?
I don't because it's easierto take a different road.
It's easier to make one distributionsomewhere in the first quarter.
(41:02):
And just say, yeah, I'm done for theyear and worry about monthly cash
flows separately as a non cash eventand a non tax and set plan event.
Because.
You're always asking the question,when you distribute monthly from a
deferred account, the first questionyou always have to be asking is, do
(41:27):
I have free cash equal to or greaterthan the amount of the distribution
logged into the automated system?
So it won't automatically sell yourinvestable assets in order to
It
will not.
Okay.
Well, I just say, sorry,we can't distribute because
you don't have enough cash.
Is that sort of the
In fact, each of thosesystems are different.
(41:49):
I can only speak to one ortwo who will remain unnamed.
Some will just say, I amdistributing nothing because I was
told to distribute X bucks and Xbucks of free cash aren't there.
The next system will say, Well, I've beentold to distribute X, but there's only Y.
They're 1500 bucks short.
(42:10):
I'll distribute everything I got.
And then the next system will do that aswell, but it won't inform you that it you.
Right.
So I think I'm going to look intochanging my annual distribution to like,
We're teaching, we'reteaching the teacher, baby.
I think I'm going to do that.
(42:30):
I just have to be careful to makesure that the other automatic
distributions is erased, whichnormally that's pretty easy to do.
I'll probably see what's in there andmaybe I can click Edit or change, and
I can change it to April because, yeah,having it on December 23rd apparently is
Well,
it sounds like it sounds like youwant to create your 72 T in the first
(42:52):
quarter, have your payment come outin the first quarter, and probably
have five years of cash in there.
So you don't even need to thinkabout selling investments in order
to meet your cash requirements.
Well, can I say something about that?
So Bill, our friend, Eric Cooper, he setup a 72 T and I was chatting with him
back and forth and he said he was kindof, looking at more towards the end of
(43:14):
the year for the first year that you setit up because you don't know how your.
income is going to run.
So that was part of the reasonwhy I was waiting to the end.
I'm sure he didn't mean, the endof December, he's like, well,
be careful because like, for me,I don't have a regular income.
And if I happen to get a nice big chunkfrom a project that I work on, not for
(43:36):
doing this podcast, but for others, but Idon't get nothing for this but let's say
if I had a chunk of money to come in Iwouldn't want to do that at the beginning
of the year and I may only be able toassess that towards the end of the year.
So that's a tricky thing trying tochoose the right time of the year.
(43:57):
You
Well, that's just like
your, that's just like your Rothconversion in the final quarter, but maybe
at the beginning of the last quarter.
So we're getting into the weeds here.
I want to know too Mr. 72T, are thereany other big mistakes that we can make?
Cause we learn from the mistakesand I want to make sure Jackie gets
Yeah.
(44:17):
well, the third person, we didn't talkabout the third party who can make
a mistake, and that's the taxpayer.
Yeah.
I didn't say you made a mistake.
see you wagging your finger at me.
Right.
There are I spend a couple pages on,I call them do's and don'ts, rules
of the road, of distribution plans.
(44:39):
First Early in the year,take care of everything.
Second rule, one transaction per IRA.
third rule is really an avoidance one.
Some people in the planning process,we decided it's a good idea to
have multiple plans running.
And it's an easy jump to say,Oh, it doesn't matter which IRA
(45:05):
I take the distributions from.
It's an enormous issue.
You must keep the one to onecorrespondence of distribution
to IRA balance working.
Never take all distributionsfrom one or two or crisscross
because those are modifications.
a
(45:27):
is, because that's important.
that's where these mistakes lie.
And then we need to talk about thepenalties if you make a modification.
modification, believe itor not, is not defined.
In the Internal Revenue Code,it just says, if you do modify,
bad things are going to happen.
What's a modification?
(45:49):
Intentionally stoppingdistributions is obvious.
Or even missing a quarterlyor annual distribution, both
of which I have seen happen.
Is modification, whether it'sintentional or accidental stuff that
slipped over from between Christmas andNew Year's and doesn't get processed
(46:11):
until January 3rd of the next year.
That's a modification.
So big bucks that were supposedto be distributed weren't or bucks
that weren't were distributed.
Are all modifications.
I suppose the next technical questionis, well, how small can the difference
(46:33):
be that it's not a modification?
To which I give you a two part answer.
First part, don't go there.
Second part, 25 bucks.
I don't think anybody is interested,including the Internal Revenue Service,
of penalizing taxpayers for what istantamount to or close to rounding errors.
Thank you very much.
(46:53):
But anything above that becomes suspectto being, quote, a modification,
and the answer is real simple.
Don't go there
right.
So on the point of modifications, I wantedto clarify this because again keying
in on your practical, sensible stuffthat you should be doing, I know that
technically using a 401k versus an IRA.
(47:13):
Should we stay away from tryingto use a 401k to do these 72Ts?
well, obviously unless you'reusing exception number five, which
is the separation of service atage 55, Let's put that one aside.
I would always transferfrom the plan 401k.
How about a 403b?
How about a 401a?
(47:34):
is
the list of plans just goes on forever.
Get it all into an IRA first.
The reason being is you have justremoved yourself from being beneath
the employer sponsor umbrella.
And number two, this is a two parter.
(47:55):
When you go to one of thebig guys, all sell the same
products, all 10, 000 of them.
Basically, there's a great big tablein the sky and they all have the same
table and a little check mark nextto it saying, can this transaction
be purchased by an IRA account?
(48:16):
Yes or no.
And they will only let youpurchase eligible investments.
And if it's not eligible,you can't have it.
it's an
on or off switch.
It creates a much broader universe.
Of investment opportunities to you.
Now, some people can thinkof that as an advantage.
(48:37):
Other people look at it and go, Oh my God,
Yeah.
it's a burden.
So
food for thought.
Yeah,
But then there's some versions of thoseexceptions that can't use the IRA.
So you have to pay attentionto that column as well.
This is a fascinating topic becauseit gets into so many different
nuances, but they're powerful.
(48:59):
This is a powerful tool.
Jackie used and that you can useto establish goals of getting to 59
and a half or a little bit beyond.
But if you stick to what we'vetalked about today, it becomes easy.
I think this has been a comprehensive,deep dive into 72T, in particular
(49:25):
exception for the SEP rules.
What do you think, Jackie?
absolutely.
And I knew we had to have the rightperson to have this discussion.
So I wasn't even willing to engage in itwithout having someone like Mr. 72T here,
Bill Stecker, because he's done so many.
His whole business isaround early withdrawals.
(49:46):
72 T's.
He's written private letterrulings and things like that.
He has written this guide and thathe's offering absolutely free on
his website and the title of it is apractical, the keyword is practical
guide to substantially equal periodicpayment and the IRS code 72 T.
He's on the 5th edition of that.
(50:07):
So this guy's knows his stuff whenit comes to setting up a 72 T.
I actually did it myself.
He was probably one of the best resources.
He answered all of my questions.
And he's done this forso many other people.
so Bill, we appreciate you havingthis source on your website.
Now we talked about this.
I want to make sure ouraudience understands.
So you have a place to put in youremail in order to get the guide.
(50:30):
And typically people use it as alead magnet, marketing or whatever.
You're not using itfor that reason at all.
So you collect theemail addresses for what
Well, I collect your name and your email.
Just arguably for the, I suppose,my own personal interest of how
many people are getting copiesof the guide I make a promise.
(50:50):
I would never sell.
Or reuse in any fashion, anyone'sname or email, you get the guide.
And my issue is I viewmyself as a gatekeeper.
It's my job, not yours to keep trackof honestly, what Congress and the
(51:13):
internal revenue service are up to.
and so that when they make a changeeither in an IRS pronouncement or
Congress adds another couple ofparagraphs to code section 72 T, one, I
know about it, two, I can let you knowand I can also in certain cases offer
(51:37):
my opinion as to whether they've donesomething good or stubbed their toe
Well, that begs an interesting question,for the future, in order to flex this plan
as a lever, what would you like to see?
What would you want Congress to do?
to be blunt about it.
Remove code section 72 T in its entirety.
(51:58):
Just get rid of it.
I believe it to be government overwatch,almost bordering on inappropriate.
I mean, there's a school of thinking towhich I do subscribe, which basically
says this money in this IRA account.
Or Roth IRA or 401k or 403b.
(52:19):
I don't care where it is.
It's my money.
It's not yours.
I'm fully vested.
So there's no forfeiture.
And if it's mine, and did you offerme an advantage in earlier decades
by not taxing the gains in those.
(52:41):
Earlier 20s, 30s, 40s,whatever time period.
Yeah, you did.
And so, are you due your just due?
When I start making withdrawals,is it appropriate that it be
treated as ordinary income?
Yeah, I'm willing to accede that.
I'm not asking for a gift.
But, I'm also asking that yourecognize this money is mine.
(53:04):
It was always mine.
It was never yours.
And that when I decide to withdrawit, I write you a tax check.
End of conversation.
I love it.
Yeah,
absolutely
if that puts me out ofbusiness, I'm happy.
I've never heard this comment before.
I think you're absolutely right.
they hold us hostage till 59.
(53:25):
5, except for these exceptionrules, which are complicated and
sometimes difficult to navigate.
Why not get rid of the rule, but theymight be promoting early retirement.
there would be less workforce.
It might run the economya little differently.
There might be less return or less GDP.
And so I completely agree withyou for the fire movement.
(53:46):
That would be awesome forthe people that get it right.
And for the people that needthe money sooner, because
they burn out and they can't.
do this or, in that capacitywith this particular job anymore,
would be ultimate flexibility.
Just like Jackie, when we had theHSA episode, we said everybody
should have access to an HSA.
(54:07):
Yeah, yeah.
So, you're saying we wish there was noneed for the 72 T and let's just open it
up to say there is no 10 percent penaltyfor early withdrawal or even if they
wanted to split the baby and say, okay,come up with an earlier number because
I hate that they're trying to ration youin the beginning, you know, saying you
can't start to 59 and a half, but waita minute, we're going to make you take
(54:29):
it after 75 or whatever that number is.
I hate the, let me tell youwhat to do and when to do it.
people don't remember, butthat's the way it used to be.
We got IRAs and 401k plans of varyingversions from the late 70s through 1985.
(54:51):
And the real issue was, backthen, they were no big deal.
How could you have amillion dollar IRA in 1980?
was a mathematical impossibility.
And so, back in the late 70s, early80s, All of these deferred defined
contribution account types were like Isaid, no big deal, no big bucks involved.
(55:17):
I'm sorry to report the lastnumber I saw, this was a 22.
trillion dollar issue.
And so it's not until 1986, we getthe tax reform act of 1986, which is
the first enactment of code section 72T, which says I'm going to surtax you
(55:42):
because it started becoming important.
It was just going up that curveof how many bucks are involved.
And Congress said.
I want some.
Yeah.
Sorry for deviating from thepracticalities of 72t plans to,
(56:03):
maybe my political persuasions,which is what they are.
But, like I said, I'min this land every day.
And I'll say it this way.
I'd be happy if I was out of business.
Yeah, that is a great way to end it.
You are so great at what you do.
I'm so glad that I found you andyou didn't think I was a stalker,
(56:24):
but you responded and we talkedquite a bit before we got you on.
So Bill, we've had a history lesson.
Okay.
We've had a math and financial lesson.
And we had a retirement and taxstrategy lesson in this whole episode.
So I know you've helped a lot of people.
This was with an expert that knowswhat he's doing, a CPA that's been
(56:46):
practicing for four decades at least.
That is providing so muchfree stuff on his website,
which is 72 t calc, CAL c.com.
I'll put it in the show notes.
And he gives away this free bookthat's now in its fifth edition.
To allow you to go through everything.
There was some nuancedquestions that I had.
(57:07):
It answered those questions whenI was finding it nowhere else.
so Bill Stecker, where can people findyou if they want to connect with you?
Find out more.
We've got your website, but isthere any other way people can
contact you if they wanted to?
Sure.
You've mentioned thewebsite multiple times.
Thank you for that.
(57:28):
Have your pencil ready?
You want to give me a call?
My phone number is area code312-361-0221 that is a downtown
Chicago phone number, but guess what?
It rings in Colorado.
So
Yeah, you got two different residents
well,
I will always answer my business line.
(57:51):
what is the name of your business?
The name of my business is also myemail, which is the marble group,
just like it sounds T H E. Marblelike the stone group at, and I use a
mountain provider because we don'thave cable up here because it's kind
(58:11):
of hard to dig trenches through rocks.
they're called whispertel, W I SP as in Peter E R T E L dot net.
They are the mountain internetservice provider of note for.
Montana, Wyoming, Utah, Colorado,Arizona, New Mexico, et cetera.
(58:37):
okay.
So
Jackie, we're coming up on two hours.
Anybody that has made itthrough these two hours is now
an expert
they are, they are, and I will put allof your contact information in the show
Sure.
you won't find them on socialmedia or anything like that.
This is the only
don't, I'm too old for that.
I'm sorry.
(58:57):
Oh, don't say that.
well, remember, this isBill's first podcast.
And I think I think he hasdone an outstanding job.
I hope this is not his last podcast.
I want his website to spike in peoplethat are curious, see his email list
grow, because learning about the72T, you learn about how to plan
(59:23):
your life backstop on accessing moneythat is yours, And we heard it here
first, blow it up, blow up 72 T'sso that we have access to our money.
love it.
I love everything about this episode.
I was wondering where this was goingto go because I thought it was a weeds
issue, but this is a much bigger issue.
(59:45):
And I thank you, Bill, for joiningus today on catching up to FI.
Absolutely.
My pleasure.
And I hope that a number of yourlisteners, viewers get knowledge
base out of this to at leastbe able to understand that.
Knowledge is power.
And so whatever decisions Imake become better decisions,
(01:00:09):
the more knowledge I've got,
Well said, and we will catch younext time on catching up to fi.
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