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Section 72(t) withdrawals

If that’s not an eye catching title of a blog post, I don’t know what would be!

A reader writes, “Joe, I’ve read all the books on finance, have saved a large chunk of my income and lived like the “Millionaire Next Door” long before the book of that title was published. Now, in my late 40’s I’m eying early retirement, but much of my savings is pretax, in IRA accounts, both from deposits and rolled over from 401(k) accounts. Is there any way to get some money out without a 10% penalty?” – Stephan T.

Well, first, Stephan, thanks for writing. I am always trying to solicit questions and ideas for future posts.

Now, to your question. The IRS does offer you an out. It’s called Section 72(t) after the portion of the tax code that addresses this issue. You are permitted to take withdrawals from your IRA which follow a “series of substantially equal periodic payments (SOSEPP)”. Once you begin this process, you must continue this exact withdrawal amount for 5 years or until age 59-1/2, whichever comes later. So for others who are approaching age 59-1/2, they may be best off avoiding this option, but for you it may be perfect. The choices for calculating that periodic payment are minimum distribution, amortization, and annuitization. I recommend the book titled “A Practical Guide To Substantially Equal Periodic Payments And Internal Revenue Code 72(t)” if you are serious about implementing this plan and are not clear from the IRS site.

Joe

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