What is the 72(t) Rule?

The 72(t) rule refers to IRS Code 72(t), which allows investors to take early distributions without incurring 10% penalties.

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What Is The 72(t) Rule?

The 72(t) rule necessitates that IRA owners take at least five “substantially equal periodic payments.” These payments must occur over the span of five years or until the owner reaches age 59.5, whichever is longer. The distribution amounts will depend on the account owner’s life expectancy, which can be calculated through one of three methods. These methods are the amortization method, the minimum distribution method, or the annuitization method.

The amortization method calculates yearly payment amounts by amortizing the account balance over a single or joint life expectancy. The calculated distribution amount remains fixed annually in this method.

The minimum distribution method, also known as the life expectancy method, derives from a calculation of the IRA balance as of December 31, the prior year, divided by an age-specific factor. With this method, the annual payments are likely to vary each year.

The final IRS-approved calculation is the annuitization method. This uses an annuity factor defined by the IRS to determine equivalent yearly payments. This method offers IRA owners a fixed annual payout. The withdrawn amount is typically somewhere between the highest and lowest annual amount that can be withdrawn by the account owner.

Consult with your financial team to determine whether you qualify for an early distribution penalty exemption via the 72(t) rule. For more information about self-directed investing or your alternative investment options, please don’t hesitate to contact New Direction Trust Company at 877-742-1270.