What is an early IRA distribution?
We are often asked, “How can I retire early and take money out of my 401k, 403(b), TSP, 457 plan, and/or IRA without paying the IRS the extra 10% “early withdrawal penalty” because I am NOT age 59 ½ yet?” This rule allows individuals to unlock their pre-tax retirement money without penalty for any reason.
It’s very easy to do. We have done it MANY times! The IRS has a rule called 72(t), “Substantially Equally Periodic Payments”. By using the IRS rule 72(t), it ELIMINATES the 10% early withdrawal penalty normally due for withdrawals prior to age 59 ½.
Here’s how it works: Let’s say you are still working but want to retire (let’s say in this example) at the age of 54. First, you quit working. Then you ROLL your 401k into an IRA. After the rollover is completed you apply for a 72(t) “Substantially Equal Periodic Payments” (SEPP). The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “Substantially Equal Periodic Payments” (SEPP) will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on the IRS mortality tables).
Here are the (3) methods that can be used to calculate your 72(t) income:
- Minimum distribution method
- Amortization method
- Annuitization method
The rule is, once a rollover is completed and a 72(t) is setup to pay out an income stream, it must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62, then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
After the 72(t) has stopped, then of course you can take out of your IRA any amount you might desire or require. We need to point out, just for clarification, that YES all the income you receive is 100% “income taxable” at your applicable ordinary income tax rate but without any added penalty.
A word of CAUTION!
Do it right and it works beautifully. Do it wrong by withdrawing too much and you can end up broke! PLUS, the IRS may assess the 10% penalty on all amounts withdrawn from the beginning if you break the 72(t). That’s the rule. Therefore, it’s imperative you work with a Firm who knows what they are doing!
Experience, wisdom & knowledge do matter
Not all Financial Advisors, CPA’s, Tax Attorneys, Banks, Brokers or Mutual Fund Companies know about this little known 72(t) IRS rule. Also, more importantly, NOT ALL companies know how to structure a 72(t), how to set it up properly or have the capability available to do such distributions correctly.
We have effectively set up 72(t) Distributions for income withdrawals for clients prior to age 59 ½ MANY TIMES and it works perfectly, IF DONE CORRECTLY. It is completely legal and ANYONE (at any age) can use a 72(t)! Many companies and many advisors, simply do not know HOW to properly structure a 72(t). Work with a Firm who is experienced and knowledgeable in this specialized area.
Would you like an ESTIMATE of what YOUR 401k, TSP, 403(b), 457 plan or IRA might produce for an income using a 72(t) for early withdrawals to eliminate the IRS penalty? Simply provide us: your age, your beneficiaries age, the amount of money in your retirement plan and using the current % rate with our advanced 72(t) calculator, we will prepare an income estimate for you. FREE! No obligation! We mean it!
This early withdrawal provision also works for non-IRA annuities to eliminate the IRS 10% early withdrawal penalty. It’s called a 72(q) for non-qualified annuities and works the same as a 72(t) for IRA’s.
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