Rule 72(t)
Candlefocus EditorIn order to make 72(t) withdrawals penalty free, the individual must withdraw money from their IRA in a series of substantially equal periodic payments (SEPP), which are based on the individual's life expectancy or the life expectancy of their beneficiaries. These payments must take place over the course of five taxable years or until age 59 1/2, whichever is longest.
While 72(t) distributions are beneficial when faced with an emergency financial situation, it should always be considered as a last resort. This is because 72(t) distributions reduce the overall size of the account and the compounding effect of tax-deferred growth that is normally associated with a retirement plan. It's important to explore other options such as creditor negotiation, consolidation, and bankruptcy to reduce financial pressure and ensure that the retirement savings are preserved.
Individuals who want to take advantage of 72(t) distributions should be aware that the rules can be complex and should seek the advice of a qualified tax advisor to ensure compliance with the law and avoid unintended tax consequences.
In addition to 72(t), the IRS provides a number of other exemptions from early distribution penalties. The exceptions include distributions taken to cover medical expenses that exceed 10% of the taxpayer's adjusted gross income, distributions to purchase a first time home, and distributions taken by individuals who have become disabled.