72(t) Basics

 If you have an IRA and are under age 59½ but want to take distributions from your IRA, one exception to the 10% penalty for early IRA withdrawals is found in the Internal Revenue Code under I.R.C. 72(t). This section of the code permits an IRA owner to set up substantially equal periodic payments (SEPPs) from his/her IRA.

Here are some of the basics:

Most Modifications are Prohibited and a modification will trigger penalties that apply retroactively PLUS interest to all distributions made before age 59 ½! No contributions or other additional withdrawals are permitted – the balance may only change due to earnings and losses credited to the account.

Any Change in Your Financial Need is irrelevant – you must continue with 72(t) distributions even if you no longer need the money! Also, any unneeded distributions cannot be rolled into another IRA or converted to a Roth IRA.

A FULL 5 Year Minimum SEPP Commitment is required under a 72(t) payment plan. You must wait until the longer of the end of that 5th year or when the owner turns 59½ to make any modifications to the IRA, i.e., contributions, additional distributions.

*TIP: Segregate the IRA Funds to avoid triggering a modification if you are using the balance of more than one IRA for establishing a plan and calculating the payments.

*CAUTION: Once committed, you are basically stuck with it – the rules are very restrictive so be sure there are no other options available before you decide to choose a 72(t) distribution plan.