The Wall Street Journal - USA (2020-12-07)

THE WALL STREET JOURNAL. Monday, December 7, 2020 |R3

Individual retirementaccounts

have strict rules for depositing and

withdrawing money. But there are ex-

ceptions, and one of them is attract-

ing attention these days—“substan-

tially equal periodic payments.”

Often referred to as 72(t) plans,

this option allows those under the

age of 59½ to withdraw funds early

from their traditional IRA accounts,

for any reason, without paying the

usual early-withdrawal penalty of

10% on top of the regular taxes.

“We’ve noticed a lot of 72(t) activ-

ity because of the pandemic,” says

Stuart Spivak, senior partner of Spi-

vak Financial Group, a wealth-man-

agement firm in Scottsdale, Ariz.

“People are looking to get income.”

The plans can be useful for people

facing big expenses—but come with

limitations and potential drawbacks.

And investors must be careful before

they take the plunge, because the

plans are a multiyear commitment.

The basics

The plans—named for the section of

the Internal Revenue Code that de-

tails their use, 72(t)(2)(A)(iv)—give

investors a series of equal payments

taken at least annually. The duration

ofaplanmustbeatleastfiveyears

or until the person reaches 59½,

whichever is longer.

There are three IRS-approved

methods to calculate the payments

from a 72(t) plan, each using a dif-

ferent IRS formula based on the in-

vestor’s age and life expectancy.

Why does the government offer

this loophole in the first place? It

realized people might face difficult

situations that force them to tap

extra funds before retirement—and,

for many people, IRAs are their larg-

est source of savings. At the same

time, the government wants people

to have money available at retire-

ment, and to discourage one-time

invasions of the account. That's

why the plan doesn’t allow you to

withdraw all the assets in your IRA,

and why the distributions are bro-

ken down into periodic payments.

A 72(t) plan is just one of the ex-

ceptions to the 10% early-distribution

penalty for IRAs. Others include ex-

penses for birth or adoption, higher

education and first-time home pur-

chases. What’s more, for 2020 only,

the Cares Act created coronavirus-re-

lated distributions as another excep-

tion. (Early distributions also can be

set up for certain withdrawals from

other qualified retirement plans like

401(k)s and 403(b)s.)

But there are important things to

remember about 72(t)s. You must be

prepared to stick with it over the

long haul. If you begin a plan at age

50, you must continue until you

reach 59½. If you begin at 57, you

BYLEONARDSLOANE

Some

Early IRA

Payouts

Won’t

Penalize

You

must continue until age 62. “Make

sure you commit to the payment

plan,” says Sarah Brenner, director of

retirement education at Ed Slott &

Co., a tax-consulting firm in Rockville

Centre, N.Y. “You really need to be

sure you want to be locked into the

payment plan for a long duration.”

A retroactive penalty

Another consideration: Except for sit-

uations involving disability or death,

any modification of the payment

stream—such as withdrawing more

or less than the calculated amount,

adding to the account or rolling over

funds into the account—will trigger a

retroactive 10% early-distribution re-

capture tax. Interest during the defer-

ral period is also assessed.

What is possible, though, is split-

ting an IRA into two before with-

drawals start, if such a move is finan-

cially desirable. By separating, one

IRA can be used to calculate and dis-

tribute penalty-free 72(t) payments

and the other can continue to be

used as before. The result is that

those who don’t need the entire

amount in an IRA as an early with-

drawal can divide it accordingly.

Due to the complexity and strict

rules of 72(t) plans, it may be useful to

consult a tax adviser to avoid mistakes.

Mr. Sloaneis a writer in New York. He

[email protected]. ILLUSTRATION BY MARTIN TOGNOLA; PHOTO: GETTY IMAGES

More people

are using the

exception

during the

pandemic

eventually claim your benefit, you

won’t seeallof these credits in your

monthly payout—at least not at first.

Rather, you receive the credits in two

stages. (And bear with me.)

First, you receive all credits that you

earned through December of the year

priorto the year in which you first file

for Social Security. Then, any credits

earned during the year you first claim

benefits are appliedthe following Jan-

uaryto your monthly payout.

Let’s use your situation. Let’s say

you were eligible for a monthly bene-

fit of $2,000 in February 2018, the

month you turned 66. If, as you note,

you first claimed Social Security in

August 2020, your first payout would

have included all the delayed credits

you earned through and including De-

cember 2019. That would be 23

months (February 2018 through De-

cember 2019) and $13.33 for each

month, or $306.59. Which means that

your first payout after filing for bene-

fits would have been $2,306.59. (To

keep things simple, I’m not including

cost-of-living adjustments.)

Then...next month, January 2021,

the SSA would apply the delayed re-

tirement credits you earned in 2020:

seven months (January through July)

and $13.33 for each month, or $93.31.

Which means that your monthly pay-

out would increase to $2,399.90. And

that figure would reflect—finally—all

of your delayed retirement credits.

Note: These rules donotapply,

thankfully, to people who first claim

Social Security at age 70. Such indi-

viduals receive all their delayed retire-

ment credits immediately.

• In a recent column about adult
  children caring for aging par-
  ents, you glossed over geriat-
  ric-care managers and how
  they can help both genera-
  tions. Please tell your readers
  about this important resource.

Happy to do so.

As the name implies, a geriatric-

care manager, also known as an “ag-

ing life care manager,” helps older

adults and their families navigate the

elder-care maze. An aging parent, for

instance, who needs assistance with

medical care, housing, legal issues, fi-

nances, transportation and related

needs could benefit from a manager.

As important, such individuals act

as eyes and ears for adult children

who live at a distance. To that end, “I

frequently performed cognitive tests

that identified problems, even when

family members and/or a primary-care

doctor hadn’t yet seen it,” says Molly

Moore, a registered nurse in Florida

and former geriatric-care manager.

To learn more, start with the Aging

Life Care Association (aginglife-

care.org). Eldercare Locator (elder-

care.acl.gov), part of the Administra-

tion on Aging, also can connect you to

services for older adults.

Mr. Ruffenachis a former reporter

and editor for The Wall Street

Journal. His column looks at financial

issues for those thinking about,

planning and living their retirement.

Send questions and comments to

[email protected].

Meantime, don’t allow yourself (as

we’ve noted earlier here) to get

caught up in things you can’t control,

including how the coronavirus will

play out. Rather, focus in the months

ahead on the large number of things

you can control, among them: setting

a budget, reducing debt, managing

taxes, planning for long-term care and

(if you haven’t already) timing Social

Security to maximize benefits.

I’m not trying to sugarcoat your

situation. You and many other new re-

tirees were dealt a tough hand. But I

have to believe better days are ahead.

• My question is about Social
  Security and delayed retire-
  ment credits. I thought my
  benefit would increase each
  month that I wait to file for
  Social Security beyond my full
  retirement age. But when I
  claimed benefits in August, at
  age 68½, my check didn’t in-
  clude the delayed credits for
  this year. Did someone at So-
  cial Security make a mistake?

There’s no mistake. This is yet an-

other quirk in the Social Security pro-

gram. But hang in there—you should

see your full credits soon.

Delayed credits are, in effect, a bo-

nus that the Social Security Adminis-

tration pays you if you delay claiming

benefits beyond your full retirement

age (the age when a person can first

collect an unreduced benefit). For

each month you delay, your benefit in-

creases two-thirds of 1%. Example: If

you’re eligible for a benefit of $2,000

a month at a full retirement age of

66, your payout will increase $13.33

for each month (until age 70) that

you wait to file for Social Security.

But...here’s the wrinkle: When you

JOURNAL REPORT|INVESTING IN FUNDS & ETFS

• I was pushed into retirement recently when my
  company ended up downsizing because of the
  pandemic. As a result, my wife and I will need
  to tap our savings sooner than we anticipated
  and rethink our plans for the next year or two.
  Any advice about navigating 2021 and beyond?

Let me answer your question—and end this disheartening

year—with an encouraging thought or two.

To start, and if it’s any consolation, you have more com-

pany than you might realize. Since 2011, when the

oldest baby boomers (born between 1946 and 1964)

turned 65, about two million boomers have retired

each year. In the past 12 months, though, about 3.2

million boomers have retired from the workforce

(voluntarily or involuntarily), according to a study

published in November by the Pew Research Center.

Among the primary contributors to the increase:

“job losses associated with the Covid-19 recession.”

Yes, retiring earlier than planned—and in the mid-

dle of a world-wide pandemic, no less—can be un-

nerving. But let’s look at two additional studies, pub-

lished last spring, which explored, among other

topics, how retirees are faring financially.

The first, by the Society of Actuaries, found that

more than three-quarters of retirees (76%) are do-

ing the same or better financially than they thought

they would when they were working. That includes

24% who said they were doing “somewhat better”

financially, and 12% who were doing “much better.”

In the second study, by the Employee Benefit

Research Institute, 77% of retirees reported feeling

either very or somewhat confident about having

enough money to live comfortably throughout re-

Some Good News

For Forced Retirees

Also: We answer a reader’s

question about Social Security

and delayed retirement credits

tirement years. Of those, 30% feel

very confident.

Granted, these surveys were con-

ducted, respectively, in 2019 and early

2020, before the world turned upside

down. But consider two things. First,

the world in 2021, by all appearances,

will begin to right itself, and retirees,

along with the rest of society will find

their footing. And second, if you’re

worried about your finances in later

life, sizable numbers of those already

retired (as the surveys above indicate)

are saying, in effect: It might not be

as scary as you think. All of which is

more encouraging than not.

Retirees' Finances

Surveyed retirees, asked how they are faring

financially in retirement compared with

expectations when they were working, said:

Note: Figures might not total 100% due to rounding

Source: Society of Actuaries

Much

better 12

Somewhat

better 24

About the

same41%

Somewhat

worse 18

Much

worse 6

Ask Encore•Glenn Ruffenach



A 72(t) plan is

one exception

to the 10%

penalty on early

distributions.