There is an obscure IRS code referred to as “the 72t rule” that can help you make early IRA withdrawals penalty free. Let’s say you want to retire now but you need more income. Further, assume you’d like to tap into your IRA before reaching age 59 ½ and not pay any tax penalties.  
The good news is that you can do this.

(Keep in mind that this is something you have to be very careful about.  If you exhaust your IRA, you may be forced to go back to work.  

That’s why it’s critical to know how much money you need to retire and plan accordingly.) 

As you already know, if you withdraw money from your IRA prior to age 59 ½ the IRS normally slaps you with a 10% penalty on top of the income tax they levy.  

That’s where the 72t rule comes in.

What is the 72t exception?

It simply states that if you make a series of “substantially equal periodic withdrawals” from the IRA, you won’t be subject to the 10% penalty, even if you are under age 59 ½.  

So you can generate retirement income even though you aren’t 59 1/2!

The withdrawals must be made at least annually but can be taken more frequently (like monthly). 

They have to be made for your life expectancy or the joint life expectancy of you and your beneficiary.

You can use one of three methods to calculate your “substantially equal periodic withdrawal.”

1. The life expectancy method. This uses the minimum distribution rules.
2. The amortization method. This uses your life expectancy and a reasonable interest rate determined by the IRS.
3. The annuitization method. This takes your account balance and divides it by an annuity factor. The annuity factor is determined using your life expectancy plus an interest rate.

If you do decide to make this election, you would speak to your IRA custodian to determine the amounts that either election would provide and then decide which amount suits you best.

The easiest method is to speak with a professional, research your 72(t) options before you make any choices about distributions.

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