Early Withdrawal

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Financial professionals often use a 72t Calculator to calculate how much 72t IRA Early Withdrawal amount is for an individual. A 72t Calculator is not a magic box that churns out a magic number of the amount of your IRA Early Withdrawal. There are methods of calculating 72 t distributions which are factored into a 72 t calculator.

What are the three methods for calculating 72t Distributions?

Under Rule 72t, there are three approved methods for calculating the Ira Early Withdrawl amount that can be withdrawn from an IRA without penalty. Which 72t calculation method you choose depends on your individual situation. A 72t Calculator should give you the option of the three mothods of calculating 72 t distributions.

1. 72t Required Minimum Distribution (RMD) Method

The 72t Required Minimum Distribution (RMD) method calculates the distribution amount based on your life expectancy (similar to the method used for calculating RMDs for persons 70� or older). The annual 72t early distribution payment for each year is determined by dividing the IRA account balance for that year by the number from the chosen life expectancy table for that year.

Under the 72t Required Minimum Distribution (RMD) method:

• the account balance,
• the life expectancy from the chosen life expectancy table and
• the resulting annual payments are redetermined for each year.

The initial IRA early distribution amount will be smaller than using the other two 72t distribution calculation methods, but will increase each year as a percentage of the IRA account.

Note: Unlike when using the 72t Required Minimum Distribution (RMD) method for a person 70� or older where the IRA owner can take out more than the minimum, the amount determined using the Section 72(t) RMD method is the exact amount that must be withdrawn.

What you already know…

In order to limit 401k Early Withdrawal and IRA Early Withdrawal from these long-term savings investment vehicles, the Internal Revenue Code imposes a 10% premature early IRA distribution penalty tax on IRA early withdrawals made before age 59�. (The premature distribution penalty tax is 25% if distributions are made from a SIMPLE IRA in the first two years of participation.)

This penalty tax is in addition to the ordinary income taxes due on the taxable portion of any IRA early distribution.

Exceptions to early IRA withdrawl penalty

However, there are several ways in which IRA early withdrawals can be made before age 59� without facing the premature IRA early distribution tax penalty. These exceptions to early IRA withdrawl penalty are:

• If the IRA Early Withdrawal is because of the disability or death of the IRA owner.

• If the IRA Early Withdrawal is made for payment of certain medical expenses which exceed 7.5% of your Adjusted Gross Income.

• If the IRA Early Withdrawal is made for payment of health insurance premiums if you’ve been unemployed for at least 12 weeks.

• If the IRA Early Withdrawal is made for payment of qualified higher education expenses.

• If the IRA Early Withdrawal is used for the purchase of a first home (There is a $10,000 lifetime limit on these withdrawals.)

• If the IRA Early Withdrawal is used to pay IRS tax levies.

What many people don’t realize about exceptions to the IRA withdrawl penalty

What many people don’t realize is that in addition to the exceptions to IRA withdrawl penalty related to these life events, an IRA owner is permitted to make penalty-free IRA early withdrawals for any reason if he or she sets up a schedule of ��substantially equal periodic payments.�� This added exception to the Ira Withdrawal Penalty rule is called the 72t rule distribution.

About 72t distribution

These 72t Distributions �� the name comes from the section of the Internal Revenue Code permitting IRA Early Withdrawal ��can be used to meet a variety of needs for current income.

Whatever the reason for tapping into your IRA by means of IRA Early Withdrawal before age 59�, a 72t distribution can help you achieve your current financial goals without wasting financial resources on penalties.

Any IRA owner can begin taking a 72t distribution at any time, for any purpose. Moreover, money in 401k retirement plans or other qualified retirement plans that is rolled over into an IRA can then be withdrawn in this manner as IRA early withdrawals.