72(t) Distribution Impact Calculator
This calculator will show the long-term impact on your retirement account of taking a 72(t) distribution from an IRA. It looks at the annual distributions you'll be taking from the account in combination with projected future earnings to produce a reasonable calculation of how fast you'll draw down the funds in your IRA and give you an idea of how long you can expect those funds to last. It will also show you how much you can receive each year through a 72(t) distribution and gives you the option of halting distributions after five years or age 60 if you wish.
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72(t) Calculator Inputs
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72(t) Distribution Options by Reasonable Interest Rate and Type
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Account Balance by Age with Maximum 72(t) Distribution
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Reasonable interest rate
This is any rate less than or equal to 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins. Click here for more information about Federal Interest rates. For Oct. 2019, 120% of the Federal Mid-Term rate is 1.81%.
It is important to note that the associated law that created 72(t) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments (SEPP) throughout your lifetime by using an unreasonably high interest rate.
72(t) withdrawals setup prior to January 2003, had some flexibility in the choice of the reasonable rate to use. However, in 2002, the IRS issued new rules stating that only rates less than or equal to 120% of the Federal Mid-Term rate would be considered reasonable. You are now required to use a rate that is less than or equal to 120% of the Federal Mid-Term rate for either of the two months immediately prior to the start of your distribution plan.
Substantially Equal Periodic Payments (SEPP)
The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59-1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:
- Required minimum distribution method: This is the simplest method for calculating your SEPP, but it also typically produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
- Fixed amortization method: With this method, the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table or joint life expectancy with your oldest named beneficiary.
- Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per month beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer. For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8% percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the mortality table published in IRS Revenue Ruling 2002-62, which is a non-sex based mortality table. Please note that your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.
In addition, on July 3rd, 2002, the IRS ruled that you could change your distribution type one-time without penalty from the Annuitized or Amortized methods to the Required Minimum Distribution method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses, the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception please see Revenue Ruling 2002-62 on www.treasury.gov.
If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. It is important to remember that while 72(t) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.
The account balance used to determine the payment must be determined in a reasonable manner. For example, with a first distribution taken on July 15, 2013, it would be reasonable to determine the account balance based on the value of the IRA from December 31, 2013 to July 15, 2013. For subsequent years, the same valuation date should be used.
This is your current age. Use the age you will turn on your birthday for the year you are receiving the distribution.
This is your beneficiary's age. Use the age your beneficiary will turn on their birthday for the year you are receiving the distribution. This entry is ignored if you do not use your Joint Life Expectancy to calculate your SEPP.
Choose life expectancy tables
There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the 'Fixed Amortization' or the 'Required Minimum Distribution' methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details).
|Uniform Lifetime||This is a non-sex based table developed by the IRS to simplify minimum distribution requirements. The uniform lifetime table estimates joint survivorship, but does not use your beneficiary's age to determine the resulting life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary.|
|Single Life Expectancy||This is a non-sex based life expectancy table. This table does not use your beneficiary's age to calculate your life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. Choosing single life expectancy will produce the highest distribution of the three available life expectancy tables.|
|Joint Life Expectancy||This is also a non-sex based life expectancy table for determining joint survivorship using your oldest named beneficiary.|
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.
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