72(t) Explained by Stuart Spivak, Tim Hague & Mark Woodfield on Money Radio 1510 AM | 105.3 FM
Mark Woodfield & Stuart Spivak
Stuart Spivak & Tim Hague
What is 72(t)?
This is a little known part of the U.S tax code that allows people to have access to their 401(k), IRA or other retirement plan before age 59½ without paying a penalty (59½ is usually the age when you are allowed to access retirement funds without the penalty).
How does 72(t) work?
The IRS has strict requirements that you have to follow. You must take payments/income based on 1 of the 3 methods the IRS allows and you must take these payments from your account for a minimum of 5 years or to age 59½ , whichever is longer. So if you are 53 and start, you must take income for 6½ years (to age 59½) or if you start at age 58, you must go 5 years (to age 63).
Is there a penalty if you make a mistake?
Yes, for sure! The penalties are pretty severe if you are off even by $1 and this can be very costly… The IRS will go retroactive back to your first payment if there is a material modification of your series of equal periodic payments (SEPP) and a 10% penalty would be assessed on all of the income previously received. As an example, if you started this at age 53 and for the first 5 years there were no material modifications to your payments, and then after that a mistake was made, the IRS will go back to day one and assess the penalty!