72(t) Distributions are a special rule that allows those under age 59 ½ to withdraw funds from an IRA as long as they are done as a series of equal payments, or a series substantially equal payments (substantially = because there are a few ways to “make” the payments “equal”). Basically, I like to think of 72(t) as an option to turn your IRA into a de facto annuity.
Must Continue Until the Later of Age 59 1/2 or 5 Years
The rules state that you must take these payments for at least 5 years or until age 59 ½, whichever time period is longer. For example, you calculate and decide to take $1,000 per month out of your IRA starting at age 49. You would have to continue this until you attain age 59 ½. If you started at age 57, you could not stop at 59 ½ you would have to continue for 5 years until age 62.
Why would someone do this? Perhaps you have somehow accumulated a massive 401(k) or IRA balance and want to “retire” early or perhaps you have varied assets and want to retire before 59 ½ and you want to use the IRA money to “bridge” you until you qualify for social security. Sometimes you just need to supplement yourself because you are not earning enough.
There are both positive and negative forces that can influence someone to consider 72(t) distributions. Should you consider it? First consider consulting a professional as this would be considered a bit of an “advanced manoeuver” for many people. Mistakes doing this can cost you plenty – messing up your 72t distributions can cause all of your 72t distributions to be considered early withdrawals subject to penalties! If you don’t know why, then you should definitely consult a tax pro or financial advisor. If you’d like to discuss this with someone, feel free to call us – 781.393.0021 – perhaps we can point you in the right direction or help more personally if you live in New England, San francisco Bay Area or Florida (the 3 locales I am in most).
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