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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.
- 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:
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.