72(t) Distribution Impact Calculator Overview
A 72(t) distribution is an option under the tax code that allows you to take distributions from an IRA before age 59½ without paying the usual 10 percent penalty. You do not have to be sick, disabled or face other extenuating circumstances to use this option; you just have to follow the guidelines.
Those guidelines require that you take roughly equal distributions from the account for at least five years or until you reach age 59½, whichever comes last. These "substantially equivalent" distributions are based on formulas designed to fully draw down the account over your remaining life expectancy, of which you have three options to choose from.
Note that you do not need to continue following these formulas after taking the minimum number of 72(t) distributions (five years or reaching age 59½, whichever comes last). At that point, you can begin taking distributions in different amounts or even cease taking distributions to allow your account to begin growing again, if you choose to do so.
Your three options for determining your "substantially equivalent" distributions are as follows.
- Required minimum distribution: This formula divides the money in your IRA by your remaining years of life expectancy to determine annual distribution, recalculated annually.
- Fixed amortization: A fixed payment based on amortizing the draw-down of your IRA over your remaining years of life expectancy, based on the defined Reasonable Interest Rate.
- Fixed annuitization: A fixed payment based on an annuity formula created by the IRS, which also takes into account the defined Reasonable Interest Rate.
In all three options, life expectancy is based on the IRS Single Life Expectancy Table. The Reasonable Interest Rate is defined as less than or equal to120 percent of the Federal Mid-Term Rate in one of the previous two months. Both the Life Expectancy table and current Federal Mid-term rate are programmed into this calculator.
You can only take a 72(t) distribution from an IRA and not from a 401(k) or 403(b) retirement account. In some cases, you may be able to roll a 401(k) or 403(b) into an IRA to take a 72(t) distribution.
The exact rules for a 72(t) distribution are fairly complex, so it's important to speak with a financial consultant before proceeding.
Using the 72(t) Distribution Impact Calculator
Enter your information in the boxes indicated. If you have questions about any of these, click on the title of the box for more information.
In particular, note the following:
- Account balance: The balance in your IRA as of the end of the previous year
- Reasonable Interest Rate: This is a rate less than or equal to 120 percent of Federal Mid-Term Rate in either of the previous two months. Click on the title of this box for the current rate.
- Projected earnings rate: The average rate of return on your IRA that you expect going forward. Click on the title for information about historical rates of return.
- Beneficiary age: Age of the oldest beneficiary on your IRA, if applicable and if you wish to include them in your distribution calculations.
- Life expectancy table: Chose single if you wish the distribution calculations to be based on your life expectancy alone; joint if you wish to include a beneficiary's life expectancy; or uniform if you wish to include a beneficiary but not take their life expectancy into account.
- Distribution method: See explanations above.
- Post 72(t) distribution: Enter percentage of your IRA you wish to draw down each year after you complete your 72(t) distributions; enter "0" if you do not wish to withdraw further money, at least temporarily, after completing your 72(t) distributions.
The calculator will display your annual 72(t) distributions at the top of the page, while the Account Balance by Age graph will illustrate the rate at which your IRA will be drawn down. Use the "View Report" button to view more detailed information.