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72t – How a 72(t) Works

What Is 72t?

The Internal Revenue Service (IRS) has a rule called 72t, and by using the 72t rule, it eliminates
the 10% early withdrawal penalty normally due for withdrawals prior to age 59 ½.

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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 IRS the extra 10% “early withdrawal penalty” because I am NOT age 59 ½ yet?”

how 72t works women workforce early retirementIt’s very easy to do. We have done it MANY times! The IRS has a rule called 72(t), “Substantially Equally Periodic Payments or (SEPP)”. By using the Internal Revenue Service (IRS) 72(t) rule, 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/need 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 methods. The (3) IRS 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 72T income:

  • Minimum Distribution Method
  • Amortization Method
  • Annuitization Method

The 72(t) 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 all the 72(t) income you receive is “income taxable” at your applicable ordinary income tax rate but without any added penalty.

Can multiple retirement savings accounts and vehicles
be used for a 72(t) distribution?

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A word of caution about 72t distribution penalties

72(t) Done Correctly Works! Do it wrong by withdrawing too much and you can end up broke! PLUS, the IRS may assess the 10% early withdrawal penalty on all amounts withdrawn if the IRA account runs out of money before the end of the 72(t) scheduled time frame. That’s the rule. Therefore, it’s imperative you work with a specialist, who knows what they are doing! Bank Certificates of Deposit (CD’s) can not be used effectively as an investment vehicle for a 72(t) distribution.

Experience, Knowledge and Wisdom Do Matter

Not all Financial Advisors, CPA’s, Tax Attorneys, Banks or Investment Companies know about this little known IRS 72(t) rule. Also, NOT ALL companies know how to structure a 72(t), how to set it up properly, or even have the technology or electronic means available to execute and code these 72(t) early withdrawal distributions.

There are many investment options that do work effectively and many that we would suggest that you avoid. We can provide you examples of the ones that will work effectively. Just ask and we can provide that information to you.

We have effectively set-up and administered 72t’s for income withdrawals prior to age 59 1/2 MANY TIMES throughout almost 50 years and it works, if done correctly. It is completely legal and ANYONE (at any age) can use a 72(t). Once again, many companies and most advisors, simply do not know HOW to properly structure and administer a 72(t). Work with a firm who is experienced, knowledgeable and specializes in this specific type of planning.

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 IRS rates with our 72t calculator, we will prepare an income estimate for you.  FREE.  No Obligation.  We mean it.
Get a Free Estimate Today!

NOTE: 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. Learn How a 72(t) Works or if you Got a Question?

NOTE: Investment return and principal value will fluctuate, and shares/units, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Dollar Cost Averaging does not assure a profit nor does it protect against loss in declining markets. The above reference is NOT an offer to sell a product or service. Neither Spivak Financial Group or Centaurus Financial Inc. offers legal advice. Please consult with a Tax Professional for your personal tax consequences.

Learn how we can help you with your retirement.

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