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We are often asked, "How can I retire early and take money out of my 401k, 403(b),TSP, 457 plan and/or IRA without paying IRS the extra 10% "early withdrawal penalty" because I am NOT age 59 ½ yet?"
It's very easy to do. We have done it MANY times! The IRS has a rule called a 72(t), "substantially equally periodic payments". By using the IRS rule 72(t), it ELIMINATES the 10% early withdrawal penalty normally due for withdrawals prior to age 59/12.
Here's how it works: Let's say you are still working but want to retire (let's say in this example) at the age of 54. First you quit working. Then you ROLL your 401k into an IRA. After the rollover is completed you apply for a 72(t) "substantially equal periodic payments" (SEPP). 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" (SEPP) 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 the IRS mortality tables).
Here are the (3) methods that can be used to calculate your 72(t) income:
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 59 ½ 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 59 ½, 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. We need to point out, just for clarification, that YES all the income you receive is 100% "income taxable" at your applicable ordinary income tax rate but without any added penalty.
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 PLUS, the IRS may assess the 10% penalty on all amounts withdrawn if the IRA account runs out of money before the end of the 72(t) scheduled time-frame.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 a Firm who knows what they are doing!
Not all Financial Advisors, CPA's, Tax Attorneys, Banks, Brokers or Mutual Fund Companies know about this little known 72(t) IRS rule. Also, more importantly, NOT ALL companies know how to structure a 72(t), or how to set it up properly, or even have the mechanical or electronic means available to do such distributions!
Very few fixed annuities will work (but some may) because most Fixed and Fixed Indexed Annuities do not allow withdrawals during the first year of the contract. Also, most IRA owners want to withdrawal more than the growth generated by most Fixed and Fixed Indexed Annuities. Also, CD’s (Certificates of Deposit) cannot be used effectively as an investment vehicle for a 72(t) distribution.
We can provide you examples of the few annuities that will work effectively as well as other options for consideration. Just ask and we can provide that information to you.
We have effectively set up 72(t) Distributions for income withdrawals for clients prior to age 59 1/2 MANY TIMES throughout almost 50 years and it works perfectly, IF DONE CORRECTLY. It is completely legal and ANYONE (at any age) can use a 72(t)! Many companies and many advisors, simply do not know HOW to properly structure a 72(t). Work with a Firm who is experienced and knowledgeable in this specialized area.
Would you like an ESTIMATE of what YOUR 401k, TSP, 403(b), 457 plan or IRA might produce for an income using a 72(t) for early withdrawals to eliminate the IRS penalty? Simply provide us: your age, your beneficiaries age, the amount of money in your retirement plan and using the current % rate with our advanced 72t calculator, we will prepare an income estimate for you. FREE! No obligation! We mean it!
This early withdrawal provision also works for non-IRA annuities to eliminate the IRS 10% early withdrawal penalty. It's called a 72(q) for non-qualified annuities and works the same as a 72(t) for IRA's.
NOTE: Investment return and principal value will fluctuate, and shares/units, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Dollar Cost Averaging does not assure a profit nor does it protect against loss in declining markets. The above reference is NOT an offer to sell a product or service. Neither The Spivak Financial Group or Centaurus Financial, Inc. offers legal advice. Please consult with a Tax Professional for your personal tax consequences.
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