Are you one of millions of Americans today looking to retire and begin taking cash out of your retirement plan to live? Is your retirement money currently in a 401K, 457 Plan, TSA or 403(b) Plan? If you answered YES to those two questions, then you are a candidate to utilize 72(t) which essentially will allow you to withdraw money using IRS 72(t) rules and by staying within the 72(t) guidelines you can “eliminate” the 10% early withdrawal penalty that is normally assessed for individuals prior to reaching age 59-1/2.

Here is how 72(t) works.

Let’s back up a moment and assume you are still employed and you are planning to retire. The first thing you need to be aware of is that you’ll need to ROLLOVER or TRANSFER your 401K, 457 Plan, TSA or 403(b) into an IRA.

Here’s an example so you can see how the 72(t) works.

Let’s say for illustration purposes that you are looking to retire and start a 72(t) strategy at age 58. In this case the withdrawal must continue until you reach age 63, then you can elect to stop the withdrawals or continue, it is up to you. The RULE for 72(t) states that you MUST continue taking the withdrawals for a minimum of 5-years OR until you reach age 59-1/2, whichever is longer.

If for example you started at age 55, then the withdrawals MUST continue until you reach 60, which is 5-years, then you can STOP or CONTINUE.

Here is how the cash flow would work out for an individual age 55 with $340,000 ROLLED OVER from a 401K into an IRA, and the individual wants to set up a 72(t) plan. (Illustration is using a 3.43% rate as an example based on Mid-Term Applicable Federal Rate.)

Minimum Distribution Method would be ………$8,173 per year or $681 per month
Annuitization Method would be………….…. $18,384 per year or $1532 per month
Amortization Method would be……………..$18,468 per year or $1539 per month

Point to remember

The stream of income you receive from the periodic withdrawals are “fully taxable” in the year received BUT without the added 10% penalty tax and therein lies the beauty of utilizing the 72(t) strategy.

Caution

If you “Do-It-Yourself” and you withdraw too much or because of the maximum amount “you elect” to withdraw it causes your retirement money to “run out” then you will be in big trouble with the IRS and they will be assessed the 10% penalty on 100% of monies withdrawn. You don’t want that! 

That’s why it is important in regards to what kind of investment vehicle you put your retirement money into before turning on the 72(t) income switch, this can and will make all the difference to your peace of mind.