72(t) Distributions from IRA vs. 401(k): Key Differences
72(t) SEPP distributions can be taken from both IRAs and employer-sponsored retirement plans like 401(k)s — but the rules differ in important ways. Understanding these differences is essential to designing an optimal SEPP strategy.
72(t) from an IRA
Taking 72(t) SEPP distributions from an IRA is generally the most straightforward approach. IRAs are individually owned accounts with flexible custodians, making it easier to set up and manage SEPP distributions. You can also segregate a portion of your IRA into a separate account specifically for SEPP distributions, allowing you to take only what you need while leaving the rest untouched.
72(t) from a 401(k) or Other Employer Plan
Taking 72(t) distributions directly from a 401(k) or other employer-sponsored plan is possible but often more complicated. Many plan administrators are unfamiliar with SEPP rules and may not support the required distribution schedule. In most cases, it's easier to roll over the 401(k) to an IRA first, then begin SEPP distributions from the IRA.
The Rollover Strategy
If you have a 401(k) from a former employer, rolling it over to an IRA before beginning SEPP distributions gives you more flexibility and control. You can choose your own custodian, segregate the account for SEPP purposes, and work with a 72(t) consultant to design the optimal plan. Note: the rollover must be completed before the SEPP plan begins — you cannot roll over an account that is already in SEPP status.
Roth IRA Considerations
Roth IRA contributions (not earnings) can be withdrawn penalty-free at any age, so a 72(t) SEPP plan is typically not needed for Roth IRA contributions. However, if you need to access Roth IRA earnings before 59½, a SEPP plan can allow you to do so without the 10% penalty. Your 72(t) consultant can help you determine the optimal strategy for your Roth accounts.
Working with Your Consultant
The right strategy for your situation depends on the types of accounts you have, their balances, and your income needs. Our 72(t) consultants will analyze all of your retirement accounts and design a comprehensive SEPP strategy that maximizes your penalty-free income. Schedule a free consultation to get started.
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