In December 2021, the IRS released Notice 2022-06, which provides new guidance with respect to calculating and distributing 72(t) payments.
72(t) payments are a way of allowing people who are younger than 59 1/2 to access a portion of their retirement savings without a penalty. Distributions must be calculated using one of three IRS-approved methods — annuitization, amortization, RMD), and must last for the longer of five full years, or until the individual reaches 59 1/2.
Notice 2022-06 provides a number of important updates and changes to the rules, including:
- The annuitization and amortization methods may now be calculated using an interest rate factor that is the greater of 120% of the Applicable Federal Mid-Term Rate (AFR), or 5%. Previously, the maximum interest rate that was allowed was “just” 120% of the AFR. The new 5% rate can be used immediately (for newly created 72(t) payment plans).
As a result of this change, the maximum 72(t)-payment that can be generated from an account today is dramatically increased.
- For taxpayers using the RMD method, the “old” (pre-2020) life expectancy tables can continue to be used for payments this year. Alternatively, taxpayers can use the “new” life expectancy tables published by the IRS in 2020, which became effective this year for RMDs. Beginning in 2023, taxpayers using the RMD method must use the new tables to calculate annual 72(t) payments, regardless of when the schedule was first established.
It’s important to remember that 72(t) payment schedules require strict compliance with a number of rules for a minimum of five years. Thus, they should generally be considered only after most other cash-flow options have been exhausted.
However, when necessary, our advisors can help minimize the risk of such plans.
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