After recently writing about the 72(t) rules, we are also often asked “Is there a 72(t) exception” to the IRS rule 72(t) for early retirement income. Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax (and additional penalties).
Generally, the amount of money an individual takes out of an IRA or Retirement Plan prior to age 59 is called an “early” (or “premature”) distribution. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.
There are exceptions in the IRS code that allow an early or premature withdrawal from your IRA or 401(k) plan without the 10% penalty being assessed. The section of the Internal Revenue Service code that addressed these exceptions is called Section 72(t) and there are subsections of 72(t) that have specific circumstances that must be met in order to provide exception to the 10% early withdrawal penalty tax
The following list outlines reasons for a 72(t) exception to the 10% early withdrawal tax documented by the IRS:
1. Age 59 or older
4. Substantially Equal Periodic Payments (SEPP)
5. Separation of service on or after age 55 (401(k) only)
6. Medical expenses
7. Qualified Domestic Relations Order Divorce
8. Health Insurance Premium (IRA, not 401(k)
9. Higher Education Expenses (IRA, not 401(k))
10. First Time Home Purchase (IRA, not 401(k) subject to limitations)
Please note in some cases there is an exception allowing for penalty free withdrawal from your 401(k) at or after age 55 and after age 50 in even more limited cases. Please consult with a tax professional to get more detailed information on each of these exceptions. It is important that you get advice before you make a decision regarding this specialized area of financial planning. The IRS is unforgiving and the penalties for mistakes are significant.
Again, please make sure you get competent advice from a firm that specializes in this area of financial planning
Stuart Spivak, LUTCF, RFC is Senior Partner at The Spivak Financial Group and Founder of 72(t) Professor. Stuart can be reached at (888) 4-SPIVAK (888) 477-4825 or (844) PROF-72T (844) 776 3728 or 72(t) Specialist at Spivak Financial