72(t) Early Income Distribution
If a client is retiring early, laid off, or needs emergency income, and plans on taking retirement distributions early, "72(t)" withdrawals from IRAs may be a smart source of income. 72(t)s enable individuals if they are under age 59½ to
- draw money from retirement assets without a 10% penalty tax
- protect remaining assets from current taxes
- preserve the tax-deferred status of earnings
Your clients can take advantage of 72(t) penalty-free withdrawals by rolling over eligible retirement plan assets into new and/or existing IRAs. Here’s how it works:
- Withdrawals must be made at least annually for five years or until age 59½, whichever is later.
- The withdrawal amount is based on one of three standard IRS formulas: life expectancy, ammorization, or annuity. Your client should consult a tax adviser prior to selecting an IRS formula as an incorrect calculation or changes in the formula or dollar amount may trigger a 10% federal tax penalty on all amounts withdrawn. However, if the amortization or annuity formula is initially chosen and your client decides to reduce the annual withdrawal, he or she has a one-time option to switch to the life expectancy formula without incurring penalties.