72(t) Rules – Substantially Equal Period Payments

If you’re looking to retire early, have sufficient wealth and have a significant portion of your retirement money actually in your retirement accounts listen up.

The 72(t) rule that requires a Substantially Equal Period Payment may provide you the ability to tap your retirement early and avoid tax penalties.

That’s right! You can retire early and pay fewer taxes.

This strategy is for those who are under age 59 1/2, have the means to retire wish to access money from their retirement accounts and are willing to meet the strict guidelines of the IRS.

The 72(t) that requires Substantially Equal Periodic Payments can avoid the 10% early withdrawal penalty that may be preventing you from retiring early. There are three methods to which you can begin withdrawing your money using the 72(t) guidelines.

Required Minimum Distributions (RMDs)

The Required Minimum Distribution Method uses a calculation that involves the chosen life expectancy table and your account balance. Divide the account balance by your life expectancy and you’ll get the amount needed to come out of your retirement account each year. The math needs to be recalculated each year and is the only one of the three calculations not fixed.

Fixed Amortization Method

The Fixed Amortization Method uses a formula that produces an amortized amount based on your chosen mortality table. Once calculated the amount taken out each year will be the same.

Fixed Annuitization Method

The Fixed Annuitization Method is the most complicated of the three formulas. The calculation divides your account balance by an annuity factor. These payments, similar to the fixed amortization method are fixed payments.

Here are some important points to note when using the 72(t) as part of this early retirement strategy.

You must be under the age of 59 1/2 for this to make sense

The IRS has strict guidelines once you begin your payments so get professional advice before making your decisions.

Payments must continue for the greater of 5 years or until you turn 59 1/2. That means if you are 50, you must continue payments until you are 59 1/2. If you are 58 years old, then you must continue until age 63.
You must take out the exact amount calculated each year.
Distributions may be subject to income tax. Transaction fees and surrender charges may also apply.

Check out IRS Revenue Ruling 2002-62 for more information

Also check out the IRS page for the 72(t) SEPP FAQ