What are 72(t) payments with regards to IRAs?

Asked by Erin

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Answered by Karl Leonard Hicks, CFP® in Riverside, CA
A 72(t) payment is a distribution from an IRA made prior to age 59 ½. It is shorthand for the Internal Revenue Code (IRC) Section 72 part t. Although this code section covers much more than this one issue, this is the most popular provision of this code section and is also known as a Series of Substantially Equal Periodic Payments.

With a 72(t) distribution you determine the amount of the annual distribution from your IRA in a specifically manner prescribed by the code section. Once you start the distribution you have to keep it going for the longer of five years or until you reach age 59 1/2. You will still be required to pay income taxes on the amount distributed for the IRA, however as long as you follow the code section rules, you will not be subject to the early withdraw penalty.

The Website bankrate.com has a calculator that can help you determine the amount allowable of a 72(t) distribution from an account.

I hope this information helps answer your question. | 11.14.15 @ 01:10
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$commenter.renderDisplayableName() — {comment} | 12.03.16 @ 17:40
Answered by Bradford Creger, MoneyTips ContributorPRO+ in Pasadena, CA
Erin,
You are asking about “substantially equal periodic payments” under Internal Revenue Code Section 72(t) which allows one to take distributions from your IRA pre age 59 ½ without incurring the 10% early withdrawal penalty. These payments must continue for five (5) years or until you reach 59 ½, whichever is longer.

There are three (3) methods to determine your distribution as follows:
? The life expectancy method - calculated under the minimum distribution rules;
? The amortization method – where you amortize the account balance using life expectancies and a reasonable interest rate;
? And the annuitization method – where the account balance is divided by an annuity factor using both a reasonable mortality table and interest rate.

You should not rely on a web-based calculator and rather have your CPA help you figure out the amount you can take under each of these three methods. You then decide which method to use based on your own circumstances.

Essentially 72(t) – (and IRC 72(q) for non-qualified annuities) - is a somewhat flexible method to get some money out of your IRA without incurring the 10% early withdrawal penalty. Keep in mind that all of these distributions will be subject to ordinary income taxes.

I hope this helps. I would be happy to answer any follow up questions you may have regarding distributions from your IRA under 72(t).
Brad Creger

| 11.14.15 @ 01:10
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$commenter.renderDisplayableName() — {comment} | 12.03.16 @ 17:40
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