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Avoid Penalties When
Tapping an IRA Early

A 72(t) exception allows withdrawals before age 59 1/2

Millions of unemployed workers are finding it necessary to raid retirement savings to make ends meet. The problem: Withdrawals from IRAs and other retirement plans are almost always fully taxable. The bigger problem: Withdrawals made under age 59 1/2 are usually subject to an additional 10% early withdrawal penalty.

The end results can be costly. Consider, for example, someone in the 25% federal income tax bracket who needs $10,000 from an IRA before age 59 1/2. Factoring in taxes and penalty, this person would have to withdraw over $15,000 in order to net the needed $10,000.

The 72(t) exception
While taxes almost always have to be paid, there is a way to avoid the penalty from IRA withdrawals made before age 59 1/2 by using a so-called 72(t) exception. Current tax regulations allow a taxpayer to avoid the 10% penalty by taking a series of "substantially equal periodic payments" from an IRA. To satisfy the requirements, you must withdraw money at least once a year and you must keep taking withdrawals for five years or until you reach age 59 1/2, whichever is longer.

For example, a 50-year-old must take withdrawals for at least 10 years while a 57-year-old would have to make withdrawals for five years, until age 62. After the minimum-withdrawal period has been reached, the IRA owner no longer has to adhere to the withdrawal rules and is free to make withdrawals of any amount or to suspend making withdrawals until age 70 1/2, when minimum distributions from an IRA are required.

While the annual 72(t) withdrawals aren’t required to be made over your lifetime, the amount to be withdrawn each year over the required period generally must be based on your life expectancy or the joint life expectancy of the IRA owner and a designated beneficiary. This could be a problem for someone who needs to make substantial withdrawals because the allowable amount for a 72(t) withdrawal is likely to be quite low. By the way, the calculations for a 72(t) can be daunting.

Special rules for 401(k) and 403(b) plans
In certain situations, workers can make penalty-free withdrawals from 401(k) and 403(b) plans before age 59 1/2 without having to go through the mathematical gymnastics required of a 72(t) withdrawal. This exception is available for those who retire, quit or are fired at age 55 or later and applies to plans of the last employer, not the plans of former employers.

If the above sounds complicated, that’s because it is. The 72(t) exception and special rules for 401(k) and 403(b) plans are a minefield. The slightest mistake could saddle you with penalties at a time when money is dear. I strongly recommend that you check with a tax professional before attempting to make penalty-free withdrawals from retirement plans before the age of 59 1/2.

All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser regarding your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.Back to Article

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