I was trying to come up with a catchy blog post title, and this is what you get. What on earth is Ye Olde 72(t) Rule? This is the tax law that allows you to take early withdrawals from your individual retirement account as substantially equal periodic payments (SEPP), without having to pay a penalty and before the distribution age. You will still have to pay income tax on the amount distributed that shows up on your 1099-R distribution form, but there will not be a penalty for early withdrawal. Retirement funds really should be used for retirement and not taken out to stop or slow the growth of that nest egg.
The process is rather restrictive, and the calculation per the IRS is a bit complicated. You will not get out as much as you would like, since the intention is to bridge the gap in income if you stop working but have a large retirement account. The calculation for SEPP (substantially equal periodic payments) therefore allows for your retirement account to continue to grow so that it is not depleted.
A drawback to this process is that it is very inflexible, and once you start the distributions, the amounts will not change. You also cannot make any contributions to the account or conversions to Roth IRAs until your final SEPP.
The Fixed Amortization Method often results in the largest annual distribution, but there are three approved IRS calculation methods.
Here is the link to the IRS website regarding 72(t):
https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments
You must follow the schedule for five years or until age 59½, whichever comes later, unless you’re disabled or deceased.
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
