What Are the IRS Withdrawal Rules for a 72t?

strategic-early-retirement-72t-withdrawalsThe term “72t” refers to a sub-section of the Internal Revenue Code, as put together by the IRS.

The full text is under section 72, part t, but the most commonly referred to portion of this provision (IRC Section 72(t)(2)(A)(iv), to be exact) is called a “series of substantially equal periodic payments” (know as both SEPP or SOSEPP).

72t is an exception withdrawal process, which allows an individual to take money from their individual retirement account (401k, 403(b), TSP or 457 plan), without the 10% penalty usually attached to withdrawing funds early. This is done by meeting certain requirements and rules setup by the IRS, which allow for a smooth transition of your wealth over time without the headache of penalties.

Now, it’s very important that you get these steps right and adhere to all requirements. If you fail to plan, you’re planning to fail down the road, which can lead to the IRS tacking on the 10% penalties if you aren’t careful. Give this careful thought and speak with a financial professional if you have questions.

There are three methods that specifically apply in this case: (#1) the required minimum distribution method, (#2) the annuitization method, and (#3) the amortization method. Each requires calculation, with numbers from the life expectancy, mortality table, as well as a decided upon interest rate.

The interest rate is determined based on federal mid-term rate published in IRS revenue rulings. You’re allowed only one change of method of the course of your 72t withdrawals, so ensuring you get it right is key (preferably the first time, but in this case you do have one do over).

While these three methods have been laid out briefly here, please take a moment to visit our full 72t flagship guide on how to execute one properly and avoid the 10% penalty. Additionally, we’d be happy to discuss the specifics of this program with you personally.

You can reach us through our contact us page, or give us a call. We’re here to help.