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72T Calculator: Early withdrawals from retirement accounts

The IRS Rule 72T allows for penalty free early withdrawals from retirement accounts. This allows you to begin receiving money from your retirement accounts before you turn age 59 1/2 without the normal 10% penalty. Use this calculator to determine your allowable 72T Distribution and how it can help fund your early retirement.

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Definitions

Substantially Equal Periodic Payments (SEPP)
The rules for 72T distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy. The payment amount must be calculated using one of the IRS approved methods which include:

  • Life expectancy method: This is the simplest method for calculating your SEPP, but it also 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. If you are married, you have the choice of using either the joint life expectancy of you and your spouse or your single life expectancy. Either is acceptable by the IRS. If you are single, you can only use your single life expectancy.

  • Amortized over life expectancy: With this method the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy or your joint life expectancy. If you are married, you have the choice of using either the joint life expectancy of you and your spouse or your single life expectancy. Either is acceptable by the IRS. If you are single, you can only use your single life expectancy.

  • Annuitized over life expectancy: 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 Annuity 2003 Mortality Table which is a non-sex based mortality table and an acceptable Mortality Table for the IRS. Please note that your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.

    The use of the Annuity 2003 Mortality Table was introduced in the Revenue Ruling 2002-62 on October 3rd, 2002. Prior to this ruling the UP-1984 Mortality Table was used to calculate your annuitized distribution. The new mortality table has been updated to accommodate longer life expectancies.

In addition, October 3, 2002 the IRS ruled that you could change your distribution type one time without penalty from the Annuitized or Amortized methods to the Life Expectancy 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.

Account balance
This is your account balance as of the close of business on December 31st of the preceding year. The IRS has decided that the balance on this date should be used for 72T distributions with one important exception: this amount is increased by any contributions made for the preceding year after December 31st.

Your age
This is your current age. Use the age you will turn on your birthday for the year you are receiving the distribution.

Beneficiary age
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.

Use joint life expectancy?
If you are married you have the option to use the Joint Life Expectancy Table when determining your applicable life expectancy. Using the Joint Life Expectancy will usually result in a smaller distribution. You might want to take this into account when setting up your 72T distribution.

Reasonable interest rate
Generally speaking, the rate you choose should reflect what you feel is a reasonable long term rate of return for your account. It is important to note that the IRS has not defined specifically what they consider a reasonable interest rate, nor does the associated law that created the 72T distribution define such a rate. As such, the guidance from the IRS generally flows from concept that they will not allow people to circumvent the requirement of substantially equal periodic payments throughout your lifetime by using an unreasonably high interest rate.

The IRS has made a series of rulings that provide some guidance to what they consider a reasonable interest rate. The latest was issued in 2002 stating that a rate under 120% of the Federal Mid-Term rate would be considered reasonable. For example, if the 10 year U.S. Treasury notes yield 4%, any interest rate under 4.8% would be acceptable. This is a change from the 1989 the IRS ruling where it was acceptable to use an interest rate tied to the average Federal Long-Term rate. Since Federal Mid-Term rates are usually lower than Federal Long-Term rates, the affect has been a net reduction distribution amount that can be withdrawn.

Life expectancy
This is your life expectancy according the IRS Life Expectancy tables.

Joint life expectancy
If you have a beneficiary, this is your combined or "joint" life expectancy. This is calculated from the IRS Joint Life Expectancy tables. For example, if your joint life expectancy is 25 years, the IRS has determined that at least one of you will live another 25 years.



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