SPEAK WITH A PROFESSIONAL BEFORE EXPLORING 72t EXCEPTIONS
Completing your 72t early retirement distribution and documenting your IRS 72t exceptions correctly, will provide a stream of 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 Plus, the IRS may assess the 10% penalty on all amounts withdrawn, if the IRA account runs out of money before the end of the 72t SOEPP scheduled time frame.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.
The 72(t) distribution will NOT be subject to the 10% additional early distribution 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 unreimbursed 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Returned IRA Contributions: if withdrawn by extended due date of return, or earnings on these returned contributions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)
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, let’s pretend that you’re 55 years old). First, you’ll need quit your current job. 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 “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 IRS’s mortality table).
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 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 72t 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.
Below Is an Example of a 72t Distribution & SEPP
An individual age 55 (with the same age beneficiary) who has $250,000 and wants to set up a 72t, (using a rate of 4.23% for example) this would be the payout options to choose from:
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 cons...
Have You Been Planning for Early Retirement?
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