The IRS 72(t) Tax Code
72t is the Internal Revenue Tax 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.
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 home buyers, 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Returned IRA Contributions: if withdrawn by extended due date of return, or earnings on these returned contributions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.