If you’re like many people, you’re getting sick of working at your job. And instead of continuing to look for a job similar to your last one, you are considering using a combination of:
- early pensions,
- early retirement withdrawals,
- part time jobs and consulting gigs,
- and low cost living
to check out of the corporate rat race early.
Why Are People Asking 72T Questions?
Why do I think this? Because of the increased number of questions and inquiries regarding 72T distributions that I get from people all over the country.
What is a 72t distribution? It is a way to take money from your IRA or 401k before 59 1/2 if you follow certain rules (read more about it HERE).
Some of the questions I get include:
- What forms do I have to fill out?
- How do I actually go about doing this?
I think people ask these questions because, even though many articles address what a 72T is, and how to calculate the amount, few articles come out and say how to actually get it started.
How Do We Start the 72T?
The sad news is there is no special form (that I know of) that tells your custodian (the people that hold your account) that you want to do a 72T distribution. You (or your advisor) have to calculate the amount based on the 3 approved methods. Custodians won’t do this for you. Probably to avoid any liability since it might be considered a form of specific advice.
And then you have to decide how you will withdraw the funds using the custodian’s withdrawal form. Once started, make sure the distribution is coded properly so that your 1099R form (the form that the custodian will send to the IRS) designates your withdrawal appropriately.
Now that you’ve started, the key is to follow the rules. For example, after commencement, 72T distributions must continue for 5 years or until 59 1/2, whichever is LONGER. Also, you can not change the IRA (by withdrawing extra money for example) while you are taking 72T distributions. So be sure that you want to do this. You are allowed only one change in distribution methods during the term.
It’s not hard to set this up. Calculate the amount, complete the custodian’s withdrawal form, make sure it’s coded properly, and stay the course for the minimum time required at least.
However, since calculating the amount involves:
- knowing the rate to use (not hard to find – the Federal “Mid term rate”) and
- using a calculator (Bankrate.com’s is easy to use),
- and dealing with esoteric terms like “annuitization method” or “1099R”,
Some people might benefit from some advice on this.
Also, since it will be used for income before “normal” retirement age, it’s important to invest the account in a way that it will last a while but not blow up on you. That’s especially if you want to enjoy the income for a while. You don’t want to retire early then go back to work later!
Therefore, due to strict rules, and other factors that come into play, I would recommend you seek advice before, during, and after this process.
If you’d like to know more please consult the following webpages:
IRS FAQ on 72T or “Substantially Equal Periodic Payments”
To schedule a phone appointment go here:
And as always, please consult an advisor as this page, as well as all pages on this site, contains general information. See Disclaimer HERE.
Cover photo of Andy Roddick via Mike McCune on Flickr