Early IRA Distribution
Withdrawals Without Penalty

“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?”

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Early IRA Withdrawal


The IRS has a rule for an early retirement withdrawal tax exemption called a 72t, associated with a “Substantially Equal Periodic Payments (SEPP).” By using the IRS 72t 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 53 years old). First, you need quit working. Second, you ROLL your 401k into an IRA. 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 Series of Equal Periodic Payments 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 life expectancy table).

Here is an Example of a SEPP or 72t Distribution

An individual age 53 (with the same age beneficiary) who has $600,000 and wants to set up a SEPP, (using a rate of 5% for example) this would be the payout options to choose from:

$17,964/year ($1497.00/mo)
Minimum Distribution Method (recalculated annually)
$37,314/year ($3109.50/mo)Amortization Method
$36,795/year ($3066.25/mo)Annuitization Method

NOTE: This information was provided by National Life Group. The above calculations are based on the IRS 72t rules, as established by Congress, effective January 1st, 2003.

The rule states, once completing a rollover and 72t 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 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 your income received as fully “income taxable” at your applicable income tax rate, but without any added penalty.

Does 72(t) apply to a Roth IRA or any non-IRA accounts?

72(t) distributions are not applicable to a Roth IRA, as the dollars that were originally contributed to the Roth IRA have already been taxed. With a 401(k), contributions are traditionally deducted from your paycheck and your taxes are deferred until a later date. With an IRA, if you fall within a particular threshold of annual income, your annual IRA contributions are deducted from your Adjusted Gross Income so you haven’t paid taxes on those dollars yet either.

Roth IRA contributions have already been taxed, so 100% of your principal is tax free upon distribution (assuming it’s been open for 5 years and you are over Age 59 ½). Early withdrawal penalties will only be assessed to the extent that there are gains, and there is not a 72(t) exception for those penalties.

As for any other non-IRA accounts, the only exception is Non Tax-Qualified Annuities. Annuities are retirement vehicles, so even policies funded with post-tax dollars will be assessed the early withdrawal penalty if funds are taken prior to Age 59 ½. You CAN structure a 72(t)-like distribution from these annuities also. This strategy is specifically referred to as a 72(q) distribution. The payment method and options available are all the same.

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When can I take money out of an IRA without penalty?

Starting at Age 59½, you can begin taking money out of your retirement accounts without penalty. Keep in mind that you will have to pay any federal or state taxes that might be due.

Distributions from Traditional IRAs prior to Age 59½ are subject to a 10% penalty, in addition to applicable federal and state taxes. Under the following circumstances, you may be able to avoid the penalty on early withdrawals:

  1. Distributions for a first time home purchase
  2. Paying for higher education expenses
  3. Paying for medical expenses
  4. If you separate from service
  5. And finally, establishing a series of Substantially Equal Periodic Payments (SEPP)

Do I have to “rollover” my money to an IRA to access my money through a 72(t) distribution?

The answer is no, but in many cases, we recommend that you do. Employer sponsored retirement plans often carry restrictions on withdrawals and limited investment options, as well as other considerations. By “rolling” the funds into an Individual Retirement Account, you are in control of the distributions and the universe of investment options available to you. Applicable fees will vary depending on the investments chosen to fund the 72(t), but they are typically and can be much lower than fees paid through an employer sponsored plan.

Can you take a loan from your IRA?

You might be able to use your IRA assets for a short period of time using a 60 day rollover. However, you must follow the rules carefully to avoid paying a penalty. You must pay the money back and place it into the same IRA or another traditional IRA within the 60 calendar day window required by federal law. If you do not pay back the full amount within the 60 days, it will likely be considered a distribution and you’ll owe income tax on it. In addition, it may also be subject to the 10% early withdrawal penalty if you are younger than 59 ½. There are certain situations in which you may avoid the early withdrawal penalty, such as a first-time home purchase, health expenses, medical insurance, educational expenses, disability and Substantially Equal Periodic Payments.

If you would like help properly structuring your early retirement, please contact us today.

Speak with a Professional before Exploring a 72t Exception

Completing your 72t early retirement distribution and documenting your IRS 72t exceptions correctly, will provide a stream of taxable 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 72t 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 72t, 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 72t 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 72t. The most commonly used (effective) investment vehicles for a 72t 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 72t. The reason being, as stated previously, that the amount desired to be withdrawn from a 72t 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 72t. Work with someone who is experienced and knowledgeable in this very special area.

72t Payments, 401(k), TSP, 403(b), 457 plan or IRA 72t Evaluations

Would you like an ESTIMATE of what your 401(k), TSP, 403(b), 457 plan or IRA might produce for an income, using a 72t 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 72t for IRA’s. 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.

If you would like help properly structuring your early retirement, please contact us today.