72(t) Calculator: Early withdrawals from retirement accounts

The IRS Rule 72(t) allows for penalty free early withdrawals from retirement accounts. This allows you to begin receiving money from your retirement accounts before you turn age 59 1/2 without the normal 10% penalty. Use this calculator to determine your allowable 72(t) Distribution and how it can help fund your early retirement.

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Definitions

Revenue Ruling 2002-62 on www.treasury.gov

Substantially Equal Periodic Payments (SEPP)

The rules for 72(t) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% tax penalty on any amounts your withdraw. 72(t) payments must last for five years or until you are 59 1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:

Required minimum distribution method: This is the simplest method for calculating your SEPP, but it also produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
Fixed amortization method: With this method the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table or joint life expectancy with your oldest named beneficiary.
Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per month beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer. For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8% percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the Annuity 2003 Mortality Table which is a non-sex based mortality table and an acceptable Mortality Table for the IRS. Please note that your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.
The use of the Annuity 2003 Mortality Table was introduced in the Revenue Ruling 2002-62 on October 3rd, 2002. Prior to this ruling the UP-1984 Mortality Table was used to calculate your annuitized distribution. The new mortality table has been updated to accommodate longer life expectancies.

In addition, October 3, 2002 the IRS ruled that you could change your distribution type one time without penalty from the Annuitized or Amortized methods to the Life Expectancy method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception please see Revenue Ruling 2002-62 on www.treasury.gov.

It is important to remember that while 72(t) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement.

Account balance

The account balance used to determine the payment must be determined in a reasonable manner. For example, a first distribution taken on July 15, 2003 it would be reasonable to determine the account balance based on the value of the IRA from December 31, 2002 to July 15, 2003. For subsequent years the same valuation date should be used.

Your age

This is your current age. Use the age you will turn on your birthday for the year you are receiving the distribution.

Beneficiary age

This is your beneficiary's age. Use the age your beneficiary will turn on their birthday for the year you are receiving the distribution. This entry is ignored if you do not use your Joint Life Expectancy to calculate your SEPP.

Life expectancy tables

There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the "Fixed Amortization" or the "Required Minimum Distribution" methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details). The three life expectancy options are:

Table	Description
Single Life Expectancy	This is a non-sex based life expectancy table. This table does not use your beneficiary's age to calculate your life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. Choosing single life expectancy will produce the highest distribution of the three available life expectancy tables.
Joint Life Expectancy	This is also a non-sex based life expectancy table for determining joint survivorship using your oldest named beneficiary.
Uniform Lifetime	This is a non-sex based table developed by the IRS to simplify minimum distribution requirements. The uniform lifetime table estimates joint survivorship, but does not use your beneficiary's age to determine the resulting life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary.

Reasonable interest rate: This is any rate less than the 120% of the current Federal Mid-Term interest rate. It is important to note that the associated law that created the 72(t) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from concept that they will not allow people to circumvent the requirement of substantially equal periodic payments throughout your lifetime by using an unreasonably high interest rate.
72(t) withdrawals setup prior to January 2003 had some flexibility in the choice of the reasonable rate to use. However, in 2002, the IRS issued new rules stating that only rates under 120% of the Federal Mid-Term rate would be considered reasonable. For example, in January 2003 the Mid-Term Federal rate was 3.43%. This means any interest rate under 4.12%, which is 120% of 3.43%, is acceptable. This is a change from the 1989 IRS ruling where it was acceptable to use an interest rate tied to the average Federal Long-Term rate. Since Federal Mid-Term rates are usually lower than Federal Long-Term rates, the affect has been a net reduction in the distribution amount that can be withdrawn.