What Is an Early IRA Distribution?
We are often asked, “How can I retire early and take money out of my 401k, 403(b),TSP, 457 plan and/or IRA without paying IRS the extra 10% “early withdrawal penalty” because I am NOT age 59½ yet?”
It’s very easy to do. We have done it many times for our clients nationwide! The Internal Revenue Service (IRS) has a rule called 72t, “Substantially Equally Periodic Payments or (SEPP),” and when specific criteria are met by using the 72(t) rule, it eliminates the 10% early withdrawal penalty normally due for withdrawals from an individual retirement account, 401(k), TSP, 403(b), or 457 plan prior to age 59 ½.
How a 72t Works
Here’s how it works. Let’s say you are still working but want/need to retire (let’s say in this example) at the age of 54. First you quit working. Then you ROLL your 401k into an IRA. After completing the rollover, you apply for a 72(t) substantially equal periodic payments (SEPP). The IRS will offer you (3) optional payout methods. The (3) IRS payout methods will tell you how much the “substantially equal periodic payments” (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 the IRS mortality tables).
Here are the (3) methods that can be used to calculate your 72t income:
- Minimum Distribution Method
- Amortization Method
- Annuitization Method
The 72(t) rule is, once completing a rollover and a 72t is setup to pay out an income stream, it must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, if you start a 72t 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 72t has stopped, then of course you can take out of your IRA any amount you might desire or require. We need to point out, just for clarification, that all the 72t income you receive is “income taxable” at your applicable ordinary income tax rate but without any added penalty.
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