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What is a 72t?What happens if I don’t maintain my 72(t) distributions correctly?Can multiple retirement accounts and vehicles be used for a 72(t) distribution?Do I have to “rollover” my money to an IRA retirement plan to access my money through a 72(t) distribution?

What is a 72t?

72t is the Internal Revenue Code Section that covers withdrawals from retirement accounts, such as; 401k’s, 403(b)’s including Qualified Annuities, Pensions, Individual Retirement Accounts (IRA’s), or any other tax deferred retirement savings vehicles. The age at which you can start taking withdrawals from a retirement account without penalty is 591/2. If withdrawals are taken before age 591/2 then there is a 10% penalty tax assessed. However, 72(t) lists some exceptions to this rule where you can access your retirement dollars prior to age 591/2 without paying the 10% penalty tax.

Some of these exceptions include (but are not limited to): Distributions taken for first time home buyers higher education expenses medical expenses separation of service IRS levies establishing a Series of Substantially Equal Payments

These discussions will primarily focus on the last of those options: establishing a series of substantially equal payments (SEPP). This is the most frequently utilized exception, and for simplicity sake, this is the exception that we will be referring to when we use the term “72(t) distribution”.

The following list outlines reasons for a 72t exception on an early distribution documented by the IRS.

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A 72(t) early distribution will NOT be subject to the 10% additional early withdrawal tax in the following circumstances:

Age: after participant/IRA owner reaches age 59½

Automatic Enrollment: permissive withdrawals from a plan with auto enrollment features

Corrective Distributions: corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely.

Death: after death of the participant/IRA owner

Disability: total and permanent disability of the participant/IRA owner

Domestic Relations: to an alternate payee under a Qualified Domestic Relations Order

Education: qualified higher education expenses

Equal Payments: series of substantially equal payments

ESOP: dividend pass through from an ESOP

Homebuyers: qualified first-time homebuyers, up to $10,000

Levy: because of an IRS levy of the plan

Medical: amount of reimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65), or health insurance premiums paid while unemployed.

Military: certain distributions to qualified military reservists called to active duty

Returned IRA Contributions: if withdrawn by extended due date of return, or earnings on these returned contributions

Rollovers: in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days (also see FAQs: Waivers of the 60-Day Rollover Requirement)

Separation from Service: the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)

If you would like help properly structuring your 72t early distribution, please contact us today.

What happens if I don’t maintain my 72(t) distributions correctly?

There are several ways you can “bust” an early 72(t) distributions, and the consequences can have a severe impact on your taxes if the account is not managed properly. If you take any more (or any less) than the scheduled amount, or make any change to the frequency in payments (i.e. monthly, annually, etc…) or stop the distributions all together, the 72(t) is busted. And here’s where it gets messy:

Let’s say you’ve been taking your approved 72(t) distributions for 4 years. Same amounts, on time, no variations. if after 4 h years one of the previously mentioned faults occurs, the IRS will assess the penalty tax on your latest distribution, and RETROACTIVELY assess the tax on all distributions taken, PLUS interest. Say you’ve been taking $20,000 per year over the last 4 years… that’s $90,000 total and you can expect a tax bill from the IRS for more than $9,000 due immediately.

In the end, it is crucial for an individual to work with an experienced specialist when establishing a 72(t) distribution. Most Investment Advisory Firms (as well as most Accountants, Attorneys, and Bankers) are not very familiar with this strategy, and many choose to avoid it altogether due to the complexities and potential implications.

Can multiple retirement accounts and vehicles be used for a 72(t) distribution?

There are several avenues, we can take to structure the income that you want or need, assuming it within reasonable expectations.

Let’s say you lost your job and need to maximize the income you can take now for whatever reason (to pay bills, rent/mortgage payments, education expenses for children, etc…), but your retirement assets are spread out over your current 401k, an old employer 401k or maybe a Pension, and you’ve been saving in an IRA… You can aggregate all applicable retirement accounts into one IRA and calculate income off the total balance.

Another scenario maybe you are still working and your goal is to simply increase your current income temporarily and maintain your retirement account(s) for when there is no penalty for withdrawals, and in anticipation of social security income down the road… You can split one IRA into multiple IRA’s, drawing the 72t income from one and allowing the other account to continue to defer taxes. Basically, we can shift and dissect your portfolio to make this 72(t) option a valuable contributor to your retirement.

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

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How do I get my retirement money or 401(k) without penalty?

If you take a distribution from your retirement plan early (meaning before the day you turn 59 ½ or Age 55 if still in a 401k) you will generally have to pay a 10% early distribution penalty above and beyond any regular income taxes you may owe on the money.

Of course, it’s generally a bad idea to dip into your retirement account early except in extraordinary circumstances. But when using your retirement funds is your only option, it’s good to know that there are several ways to avoid the extra 10% penalty on early distributions.

The most commonly needed is establishing a series of Substantially Equal Periodic Payments (SEPP)

 

Are there any early 401(k) distribution options including 72(t)?

If you separate from service in the calendar year in which you turn 55 or later, you may be able to take distributions from your 401(k) penalty free; however, income taxes will still apply. There are additional exemptions which may allow you to avoid the early withdrawal penalty, such as: permanent disability, medical expenses that exceed 7.5% of your adjusted gross income, death of the plan participant, payments under a QDRO, certain distributions to qualified military reservists called to active duty and 72(t) (also known as series of substantially equal periodic payments).

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

The answer is no, but in many cases, we recommend that you do. An employer sponsored IRA retirement plan often carries restrictions on withdrawals and limited investment options, as well as other considerations. By “rolling” the funds into an IRA retirement plan or 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.