72(t) SEPP withdrawals for early retirement

In my neverending quest to find the best way to save for retirement, I've given some consideration to the 72(t) SEPP (substantially equal periodic payments) provision that applies to IRAs.

Basically it works like this. The 10% early withdrawal penalty can be waived, at any age, if you start taking substantially equal periodic payments designed to last the rest of your life. These SEPPs have guidelines set by the IRS, and you must be careful when you get one set up to assure that you don't get penalized for not following the guidelines.

Here's the cool part-- when you hit 59 1/2 or have been taking SEPPs for 5 years (whichever is LATER), you can stop taking SEPPs and withdraw the money at your discretion without penalty. So you can use SEPPs to help fund your early retirement, then when you hit 59 1/2 you can alter your plan to withdraw based on your needs instead of a formula. This enables you to fund both your standard retirement and any early retirement period entirely within the confines of an IRA-- giving you the tax benefits and still allowing you to take funds out before "retirement age."

How much are these SEPPs going to give you? Great American Financial Resources, Inc. has a nice calculator that will give you some idea of what one of these looks like. They also outline the rules, in layman's terms, for setting one up.

This changes the game a little bit. You now have a considerable number of options to fund early retirement: withdrawing Roth contributions, building up taxable assets and just paying capital gains taxes, or building an IRA and rolling your 401k assets into it, then setting up SEPPs. Depending on the size of your SEPPs, you may need to do more than one of these. Then when you hit 59 1/2, all these assets are fair game! Access them at your leisure, only paying applicable taxes and taking no fee hits.

My mind has been a roller coaster ride over all this research . . I've crunched way too many numbers and read way too many articles. But with the 72(t) SEPP option, I think the picture is becoming a little more clear. The best part is that conventional advice-- maxing your IRAs and 401ks-- remains applicable even if you plan to retire early. This is NICE, as it makes saving considerably less complicated.

Now that everything seems totally clear, I expect to read something in the next few weeks that confuses the issue further. But hey, early retirement wouldn't be nearly as fun as a goal if it were a stationary target. :-)