10 Rules to Know About 72(t)
By Sarah Brenner, IRA Analyst
Follow Us on Twitter: @theslottreport
Are you under age 59 ½ and looking to access your IRA funds without being hit with the 10% early distribution penalty? Taking substantially equal periodic payments, or “72(t)” payments as they are sometimes called, from your IRA may be an option for you. With 72(t) payments, you can take early distributions from your IRA and avoid a penalty. Sound too good to be true? Well, these payments are subject to many strict rules. You should understand the restrictions before you jump in. Here are 10 rules you should know about 72(t) payments before you decide that they are the answer for you.
- You can decide to start taking 72(t) payments from your IRA at any age.
- The payments must continue for at least five years or until you are age 59 ½, whichever period is longer.
- The payments must be substantially equal and generally may not be changed or stopped during the payment term, unless you become disabled or die.
- You must take the payments at least annually.
- The 72(t) payment plan is only applicable to the IRA or IRAs from which you calculated your initial payment. Before setting up a 72(t) payment plan, you can split your IRA into two IRAs, if that best meets your needs. You can use one IRA to calculate and take your 72(t) payments, while the other can remain available for future non-72(t) use.
- The IRS has approved three methods for calculating 72(t) payments. Those methods are the required minimum distribution (RMD) method, the amortization method, and the annuity factor method. The RMD method will produce smaller payments than the other two methods to start out. While other methods of calculating the payments are not prohibited, it would be extremely risky to use some other method that is not officially “blessed” by the IRS. You should generally consult with a tax or financial advisor to calculate your 72(t) payments.
- You can switch to the RMD method from either the amortization or the annuity factor method. This is a one-time irrevocable switch and you must use the RMD method for the remainder of the schedule.
- If you do not stick to your 72(t) payment plan, or if you modify the payments, they will no longer qualify for the exemption from the 10% penalty. Here is some even worse news; the 10% will be reinstated retroactively to all the distributions you have taken prior to age 59½.
- An extra withdrawal is considered a modification of the payment schedule. Any change in the account balance other than by regular gains and losses or 72(t) distributions, will be also considered a modification and the 10% penalty will be triggered. This means that you cannot add funds to your IRA either through rollovers or contributions.
10. You may not roll over or convert your 72(t) payments.
If you are thinking that 72(t) payments may be for you, it is essential that you consult with knowledgeable tax and/or financial advisor. The old adage “Do not try this at home!” applies here. Committing to these payments is a big decision. These 10 rules are just the tip of the iceberg. 72(t) payments are complex and the penalties for mistakes are hefty. Getting expert advice is a smart move.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to firstname.lastname@example.org for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at email@example.com or (516) 536-8282 with any questions.