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IRS Rule 72t

Do you, like many Americans, find yourself in the situation where you might need to take early income from your retirement savings account? Utilizing IRS rule 72(t) could provide you with a solution to this problem with as few tax consequences as possible.

IRS Rule 72(T)

Before we discuss IRS rule 72(t) I would first like to start out by saying that as a firm Flagstone Retirement Consultants does not encourage taking early distributions from you IRA before 59 ½. Experience has shown us this is a reality for some people and there is a lot of interest in the topic. If you are considering taking withdrawals from your IRA before 59 ½ one of the only ways’s to accomplish this without being subject to IRS tax penalties is if you follow the guidelines outlined by rule 72(t).

IRS Guidelines

Individual Retirement Accounts (IRAs) were created by Congress to be long-term retirement savings vehicles. They allow individuals to save money for retirement during their lifetime in a tax-advantaged manner. For this reason, taxable distributions taken from an IRA will be taxed as ordinary income and, if taken prior to age 59 ½, may also be subject to a 10% federal income tax penalty.

Who Should Consider IRA Distributions Before Age 59 ½?

If you are planning or accepting early retirement or have experienced the loss of a job and require an immediate income stream without alternative income-producing assets; or experiencing cash-flow problems without adequate assets available to create income.

Although one of these situations may apply, you should always consult with a qualified tax advisor prior to taking a distribution from your IRA.

Many times if you are considering it then you do not have any options other than to take money from your qualified plans. A suitable way to access the money may be through an IRA Roll Over. Distributions from many employer-sponsored retirement plans (410(k) 403(b) etc) will be subject to a 20% mandatory withholding as prepayment for federal income taxes, if they are not rolled over directly into an IRA. Distributions will be subject to an additional 10% federal income tax penalty if you are under age 59 ½ and do not meet an exception to the penalty.

If you separate from service in the calendar year in which you turn 55 or later you may be able to take distributions from you 401(k) penalty free, however income taxes will still apply. In some cases this may be a better option then rolling the funds into a IRA and taking 72(t) distributions.

The IRS has defined nine ways to access money from IRAs and Qualified Plans and generally avoid the 10% early withdraw penalty. Most of these ways are very limited and include.

  • Taken after age 59 ½
  • Taken due to death;
  • Taken due to disability;
  • Taken for a qualified first-time home purchase up to a lifetime maximum of $10,000;
  • Rolled over or transferred to another IRA;
  • Taken to pay medical expenses in excess of 7.5% of adjusted gross income (AGI);
  • Made by unemployed individuals for the payment of health insurance premiums, subject to certain restrictions;
  • Made to pay qualified higher education expenses; or
  • Taken as part of a series of substantially equal periodic payments (Rule 72(t)

Rule 72(t)

One method used to access assets before age 59½ is the Series of substantially Equal Periodic Payments known as rule 72(t) . This method has several rules that must be followed and can have large penalties if not administered correctly. Some of the most important rules are:

  • The distributions must be a part of a series of substantially equal periodic payments made at least annually.
  • Distributions must be based on the single life or the joint life expectancies of the IRA owner and his or her designated beneficiary.
  • Payments must continue without modification for five years or until the IRA owner attains age 59 ½, whichever is longer. Investors should take into consideration the possibility of depleting their retirement account well before the end of their life expectancy.
  • The amount that is allowed to be withdrawn is also not up to the individual but is defined by the IRS. Withdrawal amounts will generally be calculated using one of these three methods:

a.) Amortization

b.) Annuity Table

c.) Required Minimum Distribution

Withdraws are taxed at your income rate.

A hypothetical example of some one who is 50 years old, has an IRA balance of $100,000, and assuming the interest rate is 3.27% the minimum amount they would be allowed to withdrawal would be $2,923, and the maximum amount would be $4,900 annually.

To figure out an approximation of what your minimum and maximum distribution amounts would be under 72(t) visit to run a calculation using your own age and IRA account balance.

Payments Cannot be modified for Five Years or Until 59 ½ , Whichever is Longer

As previously mentioned once 72(t) payments start they can not be stopped of modified for any reason. Additions to your account,withdrawals, cessation of payments or changes to the amount of your payments will modify your series of payments. If payments are modified in any way other than due to the death or disability of the IRA owner, a 10% federal income tax penalty plus interest will be retroactively applied to the payments beginning with the first year of the distributions. This means that if your are in year 4 of taking 72(t) payments and you violate the guidelines of 72(t) your will have to pay a 10% tax penalty and interest on the entire amount you have withdrawn over the first 3 years and not just on the amount that you violated in year 4.

Also take note that 72(t) applies to only one IRA. An individual is not limited to the number of IRA’s they can have, but only on the amount they can contribute to an IRA annually. If an individual wanted to roll over $150,000 from a 401(k) into an IRA with the goal of taking 72(t) distributions he could split the entire rollover amount into two IRA’s of say $100,000, and $50,000. By splitting an IRA rollover, and segregating IRA assets to help meet your cash shortfall, but allowed other assets an opportunity to continue to accumulate tax-deferred. This may also allow you to maintain flexibility, and if necessary to start 72(t) distributions from IRA #2. Keep in mind this may not be the best option especially if the individual separated from service at age 55 or later as previously noted.

As previously mentioned IRS rule 72(t) is not something we advise everyone to do but in the modern world with many companies downsizing and employees being offered early retirement packages people are taking distributions from their IRA accounts earlier to make up for cash flow needs. There is no reason to compound an unfavorable situation with tax penalties.

To learn more about IRS rule 72(t) or any other topic please don’t hesitate to contact the Flagstone Retirement Consultants team toll free at 866-892-2080, or feel free to E-mail us at

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