I am often asked, "How can I retire early and take money out of
my 401k, 403(b), TSA, 457 plan and/or IRA before age 59 1/2? I
don't want to pay the IRS an extra 10% early withdrawal penalty off
my retirement distributions!
It's very easy to do. As a matter of face, I have done it MANY
times! By using IRC Section 72(t), it is possible to eliminate the
10% early withdrawal penalty normally due for distributions from an
IRA prior to age 59 1/2, also called taking "substantially equal
How 72(t) Retirement Distributions Work
Let's say you are still working but want to retire (in this
example)at the age of 55. First you quit working, then you rollover
your 401k into an IRA. After the rollover is completed you apply
for a 72(t) "substantially equal periodic payments". The IRS will
offer you 3 optional payout amounts. The 3 IRS optional payout
methods will tell you how much the "substantially equal periodic
payments" will be based on your age, the age of your beneficiary,
the amount of money you have, the % rate used for the calculation
and how long they expect you to live (based on IRS's mortality
The rule is, once a rollover is completed and a 72(t) is setup
to pay out an income stream, it must continue until the age of 59½
has been reached or for a minimum of 5 years, whichever comes last.
For example, if you start a 72(t) at the age of 57, it must run
until you are age 62, then it stops. If you are age 50, then it
runs until you reach age 59½, then it stops.
After the 72(t) has stopped, then of course you can take out of
your IRA any amount you might desire or require. I need to point
out, just for clarification, that YES all the income you receive is
fully taxable at your applicable income tax rate but without any
added penalty. NOTE: The above calculations are based on the NEW
IRS 72(t) rules, as established by Congress, effective January 1st,
A Word of Caution when Using 72(t) Distributions!
Do it right and it works beautifully. Do it wrong by withdrawing
too much and you can end up broke! PLUS, the IRS may assess the 10%
penalty on all amounts withdrawn, if the IRA account runs out of
money before the end of the 72(t) scheduled time-frame. That's the
rule. Therefore, it's imperative you work with someone who knows
what they are doing when setting up a 72(t) distribution.
Not all Financial Advisors, CPA's, Attorney's or Insurance
Agents, know about this little known 72(t) IRS rule. Also, NOT ALL
companies know how to do a 72(t), or how to set it up properly, or
even have the mechanical or electronic means available, to do such
I have effectively set-up 72(t)'s for income withdrawals prior
to age 59 1/2 many times throughout my years and it works
perfectly, if done correctly. It is completely legal and ANYONE (at
any age) can use a 72(t)!
A 72(t) Distribution is a Powerful Planning Tool
If you have the good fortune to be able to retire early, a 72(t)
distribution can be an absolute godsend. The rule saves you 10% in
early withdrawal penalties, and can be the deciding factor in
making your early retirement a reality!