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What exactly is 72(t)?

72(t) is a little known code within the IRS laws that allows relief for individuals under age 59-1/2 to take retirement income out of their retirement account (more on which kind of accounts later) through a series of substantially equal period payment.

Read on to learn more about how YOU can take advantage of this little known IRS code! Have a question about YOUR situation? Contact a 72t advisor at (800) 746-2378 or click here.

Here’s the basis behind the IRS code 72(t)

Many taxpayers under age 59-1/2 have worked hard to build a retirement account and might want to retire early. They should not be penalized from withdrawing money from their retirement account because they are not yet 59-1/2.

You see, generally taxpayers retiring before reaching 59-1/2 who elect to take money out of their qualified retirement accounts prior to 59-1/2 are subject to an extra 10% tax (In addition to regular income tax). These qualified retirement accounts include IRA, 401K, 403b, 457 plan or employer-sponsored plans prior to reaching 59-1/2.

Enter 72(t) - Early Retirement Withdrawals

A legal way to AVOID this 10% EXTRA TAX is when a taxpayer takes withdrawals / distributions as part of a series of substantially equal periodic payments. By following the Code you can “eliminate” this 10% penalty/tax.

A word of caution. Not all brokers, bankers, life insurance agents, investment advisors , CPAs or attorneys know about this “little known” IRS rule and most have not invested in the most up-to-date software to make certain your withdrawals are in compliance with IRS code 72(t).

At Hobert Wealth Management (800) 746-2378 we have the software to provide you with the income projection based on your age, the age of your beneficiary and the amount you wish to include in the 72(t) calculation and Hobert Wealth Management (800) 746-2378 pays an extra fee each year to make sure our number crunching software is accurate with the latest laws regarding 72(t).

Hobert Wealth Management (800) 746-2378 will provide FREE of CHARGE an income estimation for you, that’s right it is not a typo… FREE of CHARGE. That’s how confident we are that once you know more about us and how we manage money you’ll want to have us manage your money.

Here’s the best part about 72(t)

Here’s the best part about 72(t)

You don’t even have to be retired to get your hands on these periodic withdrawals providing you follow the rules.

Again, what makes this all possible for you is a “little known” section in the Internal revenue Code (IRC) called Section 72(t) (2) (IV), IRC.

Endless possibilities

Imagine for a moment the endless possibilities of using the money in your IRA. A few examples:

  • Retire now versus later
  • Pay down or eliminate credit card debt
  • Purchase a vacation home
  • Supplement your current income
  • Pay off unexpected bills
  • Take vacations each year
  • Help pay college costs, and on and on.

Let’s now get more specific as to how 72(t) can work for you

First part of the code to understand is that if properly set up (we can assist you with this part) 72(t) will avoid the 10% early withdrawal penalty. You must adhere to the codes strict rules so dealing with Hobert Wealth Management will guarantee that if your retirement account is set up to take advantage of early retirement withdrawals it is set up properly.

So you now realize by utilizing 72(t) you avoid the 10% early withdrawal penalty, however, the code says that once you start taking withdrawals you MUST continue taking them for a minimum of 5-years or until you reach 59-1/2, whichever longer.

For example, let’s say for illustration purposes that you start a 72(t) strategy at the age of 58, the withdrawal payments must continue until you are age 63, then you can elect to stop the withdrawals or continue, it would be up to you. If on the other hand you are 50 when you start up a 72(t) strategy then the withdrawals would need to continue until you reach age 59-1/2, then you can elect to stop withdrawals or continue.

Point to remember

The income you receive from the periodic withdrawals are “fully taxable” in the year received at your tax bracket BUT... without the added 10% penalty discussed above.

Example: How you can utilize 72(t)

Let’s use the example that you are still working but you would love to stop working and you are age 55. You first retire and at the same time you “rollover” your 401k into an IRA. Once the “rollover” is completed (We’ll help you every step of the way and handle all the paperwork) you then set up your newly created IRA to provide monthly or annul withdrawals based on the 72(t) rules... based on equally substantial distributions.

We’ll provide the calculation for you so you are in compliance. Uncle Sam/ IRS will allow you “three” optional payment amounts. These “three” optional payout are determined by the IRS, (Not you or us) will determine how much you can anticipate in monthly or annual payments based on your age, the age you’re your beneficiary and of course, the amount of money you have in your IRA, plus the percentage rate used for calculation and how long would be your life expectancy, based on the IRS most current mortality tables.

It all sounds quite simple but you best not make a mistake and you should not go it alone. Enlisting the expertise of Hobert Wealth Management would make good business sense.

If you “do-it-yourself” the strategy could blow up and the IRS could step in and assess YOU the 10% EXTRA TAX on all withdrawals you’ve taken out.

Therefore you should engage the service of people who know what they are doing.

Calculation: An Example of How IRS Rule 72t Works

Are you one of millions of Americans today looking to retire and begin taking cash out of your retirement plan to live? Is your retirement money currently in a 401K, 457 Plan, TSA or 403(b) Plan? If you answered YES to those two questions, then you are a candidate to utilize 72(t) which essentially will allow you to withdraw money using IRS 72(t) rules and by staying within the 72(t) guidelines you can “eliminate” the 10% early withdrawal penalty that is normally assessed for individuals prior to reaching age 59-1/2.

In a nutshell, here is how 72(t) works.

Let’s back up a moment and assume you are still employed and you are planning to retire. The first thing you need to be aware of is that you’ll need to ROLLOVER or TRANSFER your 401K, 457 Plan, TSA or 403(b) into an IRA.

Here’s an example so you can see how 72(t) works.

Let’s say for illustration purposes that you are looking to retire and start a 72(t) strategy at age 58. In this case the withdrawal must continue until you reach age 63, then you can elect to stop the withdrawals or continue, it is up to you. The RULE for 72(t) states that you MUST continue taking the withdrawals for a minimum of 5-years OR until you reach age 59-1/2, whichever is longer.

If for example you started at age 55, then the withdrawals MUST continue until you reach 60, which is 5-years, then you can STOP or CONTINUE.

Here is how the cash flow would work out for an individual age 55 with $340,000 ROLLED OVER from a 401K into an IRA, and the individual wants to set up a 72(t) plan. (Illustration is using a 3.43% rate as an example based on Mid-Term Applicable Federal Rate.)

Minimum Distribution Method would be ………$8,173 per year or $681 per month
Annuitization Method would be………….…. $18,384 per year or $1532 per month
Amortization Method would be……………..$18,468 per year or $1539 per month

Point to remember

Definition: Substantially Equal Periodic Payment (SEPP) / 72(t) Payments

Substantially Equal Periodic Payment (SEPP) / 72(t) Payments

Definition

A series of distributions from a qualified plan, 403(b) arrangement, or IRA, that are made in equal installment payments, over the life expectancy of the retirement account owner/plan participant, or the joint life expectancies of the account owner and his/her beneficiary. In general, a distribution is a SEPP if it is made as follows:

  1. Not less frequently than annually
  2. Made for the life (or life expectancy) of the participant or the joint lives (or joint life expectancies) of the participant and his/her designated beneficiary
  3. Continued for five years or until the participant reaches age 59 ½, whichever is longer
  4. Calculated using an IRS approved method

The preapproved IRS calculation methods are as follows: