Internal Revenue Code 72(t) provides taxpayers a way to withdraw retirement account funds, without penalty, prior to attaining age 59½. The rule applies to IRA accounts, as well as to qualified retirement plans.

Under existing law, funds received from a qualified retirement plan prior to the taxpayer's having attained the age of 59 1/2 are subject to a 10% additional tax or penalty. I.R.C. Section 72(t)(1) and (2). However, the statute provides exceptions to this rule in certain enumerated circumstances. I.R.C. Section 72(t)(2)(A), (B), and (C). 

The exception we focus upon in this Hot Tip is as follows: withdrawals that constitute "substantially equal periodic payments" allow the taxpayer penalty-free access to funds which would otherwise only be available upon paying the 10% penalty. I.R.C. Section 72(t)(2)(A)(iv). 

The Internal Revenue Service, in notice 89-25 (attached), has provided three methods for determining what withdrawals may constitute "substantially equal periodic payments" for purposes of the rule: These are the minimum distribution method, the amortization of account balance method, and the annuity factor method. 

Each of the methods set forth in notice 89-25 provides a manner of calculating a series of substantially equal periodic payments, based upon the life expectancy of the taxpayer and an assumed interest rate. Assuming the taxpayer withdrew funds from the retirement account in a manner consistent with one of these methods, no penalty for early withdrawal applies.

The statute includes at least one important restriction: Once a plan for withdrawing "substantially equal periodic payments" is initiated, it may not be modified (other than by reason of death or disability) for five calendar years or until the taxpayer attains age 591/2, whichever period is longer. I.R.C. Section72(t)(4)(a).  

Private Letter Rulings on the application of Section 72(t) to certain circumstances have permitted the use of cost of living adjustments (COLAS) in the formula for substantially equal periodic payments, as well as withdrawals on a monthly, rather than annual, basis.   

Accordingly, Section 72(t) provides the litigants and the court a creative and practical way to utilize the retirement savings of the parties to enhance the available cash flow for their support, without penalty, and in many circumstances, without diminishing the fund corpus.