If you are thinking that 72(t) payments may be for you, it is essential that you consult with a 72(t) specialist. This is not a do-it-yourself project. Committing to these 72T payments is a big decision. These ten 72(t) Rules are just the tip of the iceberg. 72T planning is complex and the penalties for mistakes are significant. Getting expert advice is a smart move.
Here are ten 72(t) Rules You Need To Know
- The payments must continue for at least five (5) years or until you are age 59 ½, whichever period is longer.
- The payments must be substantially equal and generally may not be changed or stopped during the payment term, unless you become disabled or die.
- You must take the payments at least annually.
- The 72(t) payment plan is only applicable to the IRA or IRAs from which you calculated your initial payment. Before setting up a 72(t) payment plan, you can split your IRA into two IRAs, if that best meets your needs. You can use one IRA to calculate and take your 72(t) payments, while the other can remain available for future non-72(t) use. Speak to a 72(t) Specialist for details on this strategy.
- The IRS has approved three methods for calculating 72(t) payments. Those methods are the required minimum distribution (RMD) method, the amortization method, and the annuity factor method. The RMD method will produce smaller payments than the other two methods to start out. While other methods of calculating the payments are not prohibited, it would be extremely risky to use some other method that is not officially “blessed” by the IRS. Speak to a 72(t) Specialist for details.
- You can switch to the RMD method from either the amortization or the annuity factor method. This is a one-time irrevocable switch and you must use the RMD method for the remainder of the schedule. Consult with a 72(t) Specialist for more information.
- If you do not stick to your 72(t) payment plan, or if you modify the payments, they will no longer qualify for the exemption from the 10% penalty. The bad news: the 10% will be reinstated retroactively to all the distributions you have taken prior to age 59 ½.
- An extra withdrawal is considered a modification of the payment schedule. Any change in the account balance other than by regular gains and losses or 72(t) distributions, will be also considered a modification and the 10% penalty will be triggered. This means that you cannot add funds to your IRA either through rollovers or contributions. Consult with a 72(t) Specialist for more information.
- You can decide to start taking 72(t) payments from your IRA at any age.
- You may not roll over or convert your 72(t) payments.
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