10 Penalty

Investing tax deferred is an enticing idea, however, most people dread the IRA Early Withdrawal penalty. Without an IRA Early Withdrawal penalty, more people will be investing in an IRA or other retirement accounts. So, how bad is the IRA Early Withdrawal penalty?

What is considered a modification to a series of 72t distribution payments causing the 10% IRA Early Withdrawal penalty to apply?

Revenue Ruling 2002-62 states that a modification to a series of 72t distribution payments will occur if, after 72t distribution payments are calculated there is:

Any addition to the IRA account balance other than gains or losses,
Any nontaxable transfer of a portion of the IRA account balance to another retirement plan, or
A rollover by the taxpayer of the amount received resulting in such amount not being taxable.

Note: This means that once 72t Distributions have begun, assets can not be moved into or out of the 72t Early Retirement IRA to another IRA or qualified retirement plan either by rollover or direct transfer. Any movement of assets must take place before the start of 72t Distributions, thus insuring an early incentive for retirment once begun.

The 72t Early Retirement IRA can not be split into two IRAs in order to place one of the IRAs in a managed account.
A 60 day rollover is not allowed.
A current year contribution or rollover from another IRA can not be made to the 72(t) IRA. It must go into another IRA.

Does the 10% IRA Early Withdrawal penalty apply if my IRA is exhausted as a result of taking 72t Distributions?

No.

Under Revenue Ruling 2002-62 the 10% IRA Early Withdrawal penalty does not apply if the account runs out of assets as the result of using an approved 72t calculation method. This will not be treated as a modification of the series of payments.