Can You Do a 72(t) While Working? Understanding the Intricacies of the 72(t) Tax Code

As you navigate your financial journey, you may come across various tax codes that can significantly impact your financial planning. One such tax code that often raises questions is the 72(t) tax code. This article aims to provide a comprehensive understanding of the 72(t) tax code and answer a common question: Can you do a 72(t) while working?

Understanding the 72(t) Tax Code

The Internal Revenue Service (IRS) introduced the 72(t) tax code to allow individuals under the age of 59½ to access their retirement funds without incurring an early withdrawal penalty. Typically, if you withdraw from your retirement account before reaching this age, you are subject to a 10% penalty on top of regular income taxes. However, under section 72(t) of the Internal Revenue Code, there are ways to avoid this penalty.

The IRS allows for three different methods for calculating Substantially Equal Periodic Payments (SEPPs), which is what these penalty-free withdrawals are called. These methods include required minimum distribution, fixed amortization, and fixed annuitization.

Can You Do a 72(t) While Working?

One common question regarding this tax code is whether or not one can initiate a Series of Substantially Equal Periodic Payments (SEPPs) under rule 72(t) while still employed. The answer is yes; it’s possible to start a SEPP plan while still working.

However, it’s important to note that once you start these distributions, they must continue for at least five years or until you reach age 59½, whichever period is longer. This means if you start at age 55, you must continue until at least age 60. If you start at age 50, they must continue until at least age 59½.

Potential Benefits and Drawbacks

The primary benefit of using the 72(t) tax code while working is that it provides an additional income stream. This can be particularly beneficial if you’re facing financial hardship or if you’re transitioning to a lower-paying job or part-time work.

However, there are also potential drawbacks to consider. First, once you start a SEPP plan, you can’t stop or alter the payments until the period ends, even if your financial situation changes. Second, taking distributions from your retirement account early means those funds won’t be available later in retirement when you might need them more. Lastly, while the 10% early withdrawal penalty is waived under rule 72(t), regular income taxes still apply to these distributions.

Considerations Before Starting a 72(t) SEPP Plan

Before deciding to start a SEPP plan under Rule 72(t) while working, it’s important to carefully consider your overall financial situation and long-term goals. Here are some key considerations:

1. Evaluate Your Financial Needs: Consider whether there are other ways to meet your financial needs without tapping into your retirement savings early.

2. Understand the Commitment: Remember that once you start a SEPP plan, you must continue it for a minimum of five years or until age 59½, whichever period is longer.

3. Consult with a Financial Advisor: Given the complexities of the 72(t) tax code and potential tax implications, it’s advisable to consult with a financial advisor before starting a SEPP plan.

In Conclusion

While it’s possible to do a 72(t) while working, it’s not a decision to be taken lightly due to its long-term implications on your retirement savings and potential tax liabilities. Understanding the intricacies of the 72(t) tax code is crucial in making an informed decision that aligns with your financial goals and circumstances. Always consult with a financial advisor before making any significant decisions related to your retirement accounts.