On 1/18/22, the Internal Revenue Service (IRS) released Notice 2022-6, which impacted two calculation methods for substantially equal periodic payments (SEPPs). See how you can use this guidance to benefit retiring clients.
Substantially equal periodic payments (SEPPs), often referred to as 72(t) or 72(q) payments, are ways to access retirement funds prior to age 59½ without the additional 10% federal tax.
On January 18, 2022, the Internal Revenue Service (IRS) released Notice 2022-6, which replaces the guidance in Revenue Ruling 2002-62 and Notice 2004-15 for any series of payments beginning on or after January 1, 2023. This guidance may also be used for a series of payments beginning in 2022. A key aspect of Notice 2022-6 is a change in two of the calculation methods for SEPPs—which could benefit retirees. Here’s how.
SEPPs are an exception for clients younger than age 59½ that allows withdrawals from retirement accounts to avoid the premature/early withdrawal additional 10% federal tax. SEPPs are called 72(t) for qualified assets or 72(q) for nonqualified assets, and financial professionals have used this option for clients who need income prior to reaching age 59½. Once the SEPP program is started, clients will need to continue the periodic payments for five years or until they reach age 59½—whichever is reached latest. Termination or adjustment of the periodic payments, called a modification, may result in tax consequences and penalties. Clients should consult with a tax professional prior to establishing and/or modifying the SEPPs.
The amortization and annuitization methods use an interest rate to calculate payments, as mentioned previously. The higher the rate, the higher the payment these methods will yield. Historically, the federal mid-term rate has been low. For May 2022, the rate is 3.01%. What’s the excitement regarding the new change? Let’s take a look.
Notice 2022-6 states that 72(t) payments could use the greater of either 120% of the federal mid-term rate or up to 5% in calculating the amortization and annuitization methods. As mentioned previously, the higher the rate, the higher the payment. This change will allow clients to withdraw more income if needed to help bridge the gap to age 59½.
Example: Based on a $500,000 account, this client is age 55 and considering early retirement:
The significant increase to the payments could sway the client to move forward with early retirement.
Reach out to clients who have considered early retirement. This change may help make their decisions easier. Early retirees with large, qualified accounts can access a portion of that asset and roll it over to an IRA to begin receiving income. Generally, retirees should try to spend down assets for tax efficiency. This means they should try to spend taxable accounts first, tax-deferred (401(k), IRAs, etc.) next, then tax-free accounts. The new SEPP interest-rate option can help retirees spend down their accounts to their advantage.
This change was just enacted earlier this year, which means companies who offer 72(t/q) calculators may not be able to support the new calculation methods. Be sure to reach out directly to discuss their policies and procedures on setting up the program.
This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial situations.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency
For financial professional use only. Not for use with the public.