By Mike Rowan, www.Erollover.com 2008
I am often asked, "How can I retire early and take money out of my 401k, 403(b),TSA, 457 plan
and/or IRA without paying IRS the extra 10% early withdrawal penalty because I am NOT
age 59 ½ yet?
It's very easy to do. I have done it MANY times! IRS has a rule called a 72T, equally
substantial distributions. By using IRS's rule 72(t) it ELIMINATES the 10% early withdrawal penalty
normally due for withdrawals prior to age 59/12.
Here's how it works. Let's say you are still working but want to retire (let's say in this example)
at the age of 55. First you quit working. Then you ROLL your 401k into an IRA. After the rollover is
completed you apply for a 72(t) equally substantial distribution. The IRS will offer you (3) optional
payout amounts. The (3) IRS optional payout methods will tell you how much the equally
substantial distribution will be based on your age, the age of your beneficiary, the amount of money
you have, the % rate used for the calculation and how long they expect you to live (based on IRS's
The rule is, once a rollover is completed and a 72(t) is setup to pay out an income stream, it must
continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever
comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62,
then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
After the 72(t) has stopped, then of course you can take out of your IRA any amount you might
desire or require. I need to point out, just for clarification, that YES all the income you receive is
Fully income taxable at your applicable income tax rate but without any added penalty.
NOTE: The above calculations are based on the NEW IRS 72(t) rules, as established
by Congress, effective January 1st, 2003!
A word of CAUTION!
Do it right and it works beautifully. Do it wrong by withdrawing too much and you can end up
broke! PLUS, the IRS may assess the 10% penalty on all amounts withdrawn, if the IRA account
runs out of money before the end of the 72(t) scheduled time-frame. That's the rule. Therefore,
it's imperative you work with someone who knows what they are doing! CD's can not be used
effectively as an investment vehicle for a 72(t) distribution.
Not all (Financial Advisors, CPA's, Attorney's or otherwise) know about this little known
72(t) IRS rule. Also, NOT ALL companies know how to do a 72(t), or how to set it up
properly, or even have the mechanical or electronic means available, to do such distributions!
I have effectively set-up 72's for income withdrawals prior to age 59 1/2 MANY TIMES
throughout my years and it works perfectly, if done correctly. It is completely legal and
ANYONE (at any age) can use a 72(t)!
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