What Is an Early 72(t) Distribution for IRA retirement plans?

72t IRA early withdrawal bannerPeople often ask…

“How can I retire early and take out money of my 401k, 403(b),TSP, 457 and/or IRA retirement plans without paying IRS the extra 10% “early withdrawal penalty?”

Early Withdrawals without Penalty

The IRS has a rule for an early retirement withdrawal tax exemption called a 72(t), associated with a “Substantially Equally Periodic Payments (SEPP)”   By using the IRS 72(t) rule, it ELIMINATES the 10% early withdrawal penalty normally due for withdrawals prior to age 59 1/2.

For example, let’s say you still work at your job, but you want to retire sooner than later (in this example that you’re 55 years old). First, you need  quit working. Second, you ROLL your 401k into an IRA retirement plan. After completing the rollover, then you apply for a “SEPP.”  The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will reveal to you how much the “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 IRS’s mortality table).

Here Is an Example of a SEPP  or 72(t) Distribution

An individual age 55 (with the same age beneficiary) who has $250,000 and wants to set up a 72(t), (using a rate of 4.23% for example) this would be the payout options to choose from:



72(t) Annual Payments Life Expectancy (29.6 Years)
$8445.95/year ($703.83/mo) Minimum Distribution Method
$14894.53/year ($1241.21/mo) Amortization Method
$14797.28/year ($1233.11/mo) Annuitization Method


(NOTE: This information was provided by Prudential’s customer service dept.)


The rule states, once completing a rollover and 72(t) setup to pay out an income stream, it must continue until the age of 59 ½ 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 funds from your IRA retirement plans of any amount you might desire or require. We need to point out, just for clarification, that your income received as fully “income taxable” at your applicable income tax rate, but without any added penalty.

NOTE: The above calculations are based on the IRS 72(t) rules, as established by Congress, effective January 1st, 2003.



Speak with a Professional before Exploring a 72(t) IRS Rule Exception

Completing an early retirement 72t exception correctly, will provide a stream of retirement income. But, if it’s done incorrectly, possibly by withdrawing too much and you can end up broke! Plus, the IRS may assess the 10% 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 someone, who has experience with the entire 72t process. CD’s can not be used effectively as an investment vehicle for a 72(t) distribution.

Not all (Financial Advisors, CPA’s, Attorney’s or otherwise) know about this little known 72(t) IRS rule. Also, NOT ALL companies know how to do a 72(t), or how to set it up properly, or even have the mechanical or electronic means available, to do such distributions! Very few fixed annuities will work (but some may) because most fixed and Indexed annuities do not allow withdrawals during the first year of the contract and/or greater withdrawals than the earnings growth. Also, most IRA owners want to withdraw more than the growth generated by most fixed and indexed annuities.



Effectively Structuring a 72(t) Distribution

We can provide you examples of the few that will work effectively. Just ask and we can e-mail that information to you. We have effectively set-up 72t distributions for income withdrawals prior to age 59 1/2 many times throughout our 50+ years and it works, if done correctly. It is completely legal and anyone (at any age) can use a 72(t). The most commonly used (effective) investment vehicles for a 72(t) are variable annuities.

One of the main reasons, is the fact that today’s variable annuities allow you to actively invest your money so it can continue to grow, offer diversification and protection, all at the same time, while you are pulling an income stream from it. Fixed accounts, stock portfolios, CD’s and MOST fixed annuities, are often not the most ideal for doing a 72(t). The reason being, as stated previously, that the amount desired to be withdrawn from a 72(t) often does not adequately match the amount of growth or offer the appropriate amount to be withdrawn. Many companies and many advisors, simply do not know HOW to properly do a 72(t). Work with someone who is experienced and knowledgeable in this very special area.



72t Payments, 401(k), TSP, 403(b), 457, and IRA Retirement Plans Evaluation

Would you like an ESTIMATE of what your 401(k), TSP, 403(b), 457 and IRA retirement plans might produce for an income, using a 72(t) for early withdrawals to eliminate the IRS penalty.

Simply provide: your age, your beneficiaries age, the amount of money in your retirement plan and using the current rates with my 72t calculator I’ll prepare an income estimate for you.

This early withdrawal system also works for non-IRA annuities as well, to eliminate the IRS 10% early withdrawal penalty on non-qualified money in any annuity. It’s called a 72(q) for non-qualified annuities but works the same as a 72(t) for IRA retirement plans. Got a Question?

NOTE: Investment return and principal value will fluctuate, and shares, 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.



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