What does 72(t) mean?

72(t) is a little known code within the IRS laws that allows relief for individuals under age 59-1/2 to take retirement income out of their retirement account (more on which kind of accounts later) through a series of substantially equal period payment.

“Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable.”

What the heck does that mean?

It means that if you meet a few requirements you can withdraw money from a retirement account prior to age 59½ without having to pay the 10% penalty. 

For investors intending to retire early, this can play a big role in your retirement plans.

It’s important to remember, however, that money coming out of a tax-deferred account will still be taxed as ordinary income, even if you meet the 72(t) requirements. 

That is, you only avoid the 10% penalty, not ordinary income taxes.

How do you use the 72(t) rule?

72(t) allows you to avoid the 10% penalty by taking a series of (at least) annual distributions from your retirement account. 

Those distributions must be “substantially equal periodic payments” (SEPPs) calculated according to methods that we’ll cover momentarily so as to distribute the entire balance of your IRA over your remaining life expectancy (or the joint life expectancy of yourself and the IRA’s beneficiary).

After you’ve begun taking your 72(t) distributions, you must continue taking them for 5 years or until you reach age 59½, whichever comes later. 

That means that once you’ve begun the payments, you’re locked in for several years. No changing your mind unless you want to deal with penalties and interest.

Once you’ve been taking the payments for 5 years and you’ve reached age 59½, you can discontinue the payments if you so desire.

If you are considering Retirement Planning, call for a free consultation today.

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