Access Retirement Accounts Early Without Penalty
June 20, 2008 – 6:17 am
Want to retire early and/or access your retirement account funds before you’re 59 1/2? If so then the 72t rule might be able to help. The 72t rule governs early distributions from retirement accounts.
The rules are complicated, but it essentially allows you to pull money out of an IRA without the 10% penalty provided the withdrawls are made in “substantially equal periodic payments” (SEPPs). The other potential downside is that these equal periodic payments have to continue for 5 years or until you reach 59 1/2, whichever is LONGER.
Note that the withdrawals are still taxed at your ordinary income tax rate. The 72t rule simply removes the 10% penalty for withdrawing money before you reach age 59 1/2. If clients do not stay with the plan the 10% penalty must be paid and will be applied retroactively to all funds removed since the plan was started.
There are three different ways to calculate the 72(t) distributions, and they are based on several factors including the IRS’s life expectancy tables. If you would like to know how much the payments would be you can use one of the many 72t calculators available online to get an estimate before working with a professional to setup the plan.
Using this capability requires planning, especially if you need funds now buy may increase your income before the SEPPs can stop. Let’s say you want to retire at 50, and you setup your SEPPs. If you decide to return to work or your income increases dramatically you could be in an undesirable tax situation.
Using this rule is complicated, so please use a CPA or other professional financial adviser. The anecdotal discussion floating around the web is that a lot of people, including some financial professionals, are unfamiliar with the details of the 72t rule. Therefore I recommend caution before making a decision like that that can’t be easily reversed.
This rule can also be used to extract funds from some types of annuities.
Image Credit: J. Pocztarski
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