There are several ways you can “bust” an early 72(t) distributions, and the consequences can have a severe impact on your taxes if the account is not managed properly. If you take any more (or any less) than the scheduled amount, or make any change to the frequency in payments (i.e. monthly, annually, etc…) or stop the distributions all together, the 72(t) is busted. And here’s where it gets messy:
Let’s say you’ve been taking your approved 72(t) distributions for 4 years. Same amounts, on time, no variations. if after 4 h years one of the previously mentioned faults occurs, the IRS will assess the penalty tax on your latest distribution, and RETROACTIVELY assess the tax on all distributions taken, PLUS interest. Say you’ve been taking $20,000 per year over the last 4 years… that’s $90,000 total and you can expect a tax bill from the IRS for more than $9,000 due immediately.
In the end, it is crucial for an individual to work with an experienced specialist when establishing a 72(t) distribution. Most Investment Advisory Firms (as well as most Accountants, Attorneys, and Bankers) are not very familiar with this strategy, and many choose to avoid it altogether due to the complexities and potential implications.