What is the 72(t) Rule?

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The 72(t) rule refers to IRS code 72(t), section two, which allows IRA owners to access their retirement savings before they reach age 59.5 without incurring the typical 10% penalty for early distributions. Withdrawn balances will still be taxed as regular income.


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The 72(t) exemption 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 time period is longer). The distribution amounts will depend on the account owner’s life expectancy, which can be calculated through one of three IRS-approved methods: the amortization method; the minimum distribution method (also known as the life expectancy method); or the annuitization method.

The amortization method calculates yearly payment amounts by amortizing the balance of an IRA owner’s account over single or joint life expectancy. The calculated distribution amount is fixed annually in this method.

The minimum distribution method can be calculated by dividing the IRA balance as of December 31, the prior year, by an age-specific factor provided by the IRS. With this method, the annual payments are likely to vary each year.

The final IRS-approved calculation is the annuitization method, which 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 The withdrawn amount is typically somewhere between the highest and lowest annual amount that can be withdrawn by the account owner.

Please consult with your accountant or tax professional 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.