72(t) Distribution Options Overview
With retirement accounts, the general rule is that you can't take withdrawals from them until you are at least age 59½. If you do, you usually have to pay a 10 percent penalty on each withdrawal.
One key exception though, is a 72(t) distribution. A 72(t) distribution allows you to begin making withdrawals from an IRA prior to age 59½ without penalty, provided you follow certain guidelines.
For starters, you don't have to be ill, disabled or facing a financial crisis to be able to utilize a 72(t) distribution. You just have to follow the guidelines and file the proper paperwork.
With a 72(t), you have to take at least five "substantially equivalent periodic payments" annually, with the amount determined by an IRS formula based on your life expectancy. There are three ways of determining the annual payments, all of which are based on formulas designed to pay out the entire account in nearly equal payments over the course of your statistically expected lifetime.
Once you begin distributions under a 72(t), you must continue them for at least five years or until age 59½, whichever comes last. So if you began 72(t) distributions at age 57, you'd have to take them until at least age 62. Once that requirement is met, you can cease taking distributions if you wish, up until age 70½.
You can't use a 72(t) with a 401(k) or 403(b) account. However, those who have left the employer with whom they had such an account may be able to roll it over into an IRA, from which a 72(t) would be allowed.
This is can be a fairly complicated financial decision, so it's important that you talk with a financial advisor before proceeding with a 72(t) or rollover. However, this calculator can help you determine if that's a path that may be worth pursuing.
Using the 72(t) Distribution Options Calculator
The calculator figures the annual payments you can receive under the three allowed methods:
- Required minimum distribution: Simply divides the money available in your IRA by your remaining years of life expectancy. This provides the smallest payment of the three. Note that this calculation is re-done every year, so your annual payments will increase or decrease each year depending on how your investments performed.
- Fixed amortization: This provides you with a fixed annual payment based on the expected draw-down amortization of your account over your life expectancy. This method typically provides the highest payments.
- Fixed annuitization: Payments are based on an annuity factor established by the IRS. This method is the most complex calculation and usually provides payments in the mid-range between the other two.
To do the calculation, enter your current IRA balance, the Reasonable Interest Rate (no greater than 120 percent of the Federal mid-term rate in one of the last two months), your age and the age of your beneficiary, if applicable. The calculator will automatically figure your life expectancy going forward.
You also need to choose which life expectancy table you wish to use, depending on whether you have a beneficiary or not:
- Single life expectancy: Periodic payments will be based on your life expectancy alone
- Joint life expectancy: Payments will be based on the life expectancy of your oldest named beneficiary
- Uniform lifetime: A simplified method for determining minimum distributions that estimate joint survivorship but does not take into account the age of your beneficiary.
Once you've entered the information required, the calculator will determine your annual distributions under all three methods and the rate at which your IRA will be drawn down. Click "View Report" for a more detailed breakdown.
If you have questions about any of the information you are asked to provide, clicking on the title of each box in the calculator will provide a more detailed explanation.