by John Savage, Author, CFHC
Are you ready to retire early? Have you saved up a bountiful nest egg before 50 and you're ready for that new chapter in your life that you have been planning for for years? if you are ready to access what you have worked so hard to accumulate in your retirement account(s) but are concerned about the early 10 percent IRS withdrawal fee and other taxes and penalties, then IRS Rule 72(T) might be an option for you. There are other sections of the Internal Revenue Code 72 that will need to be considered based the type of qualified or non-qualified plan being considered.
Rule 72(T) also known as Substantially Equal Periodic Payments, could be a great loophole to give you that extra funding you need to cover that much awaited renovation on your home, funds to invest in the business you have been waiting to start for years, or something extra so you can relax and travel the way you have been needing to start incorporating better self care routines in your life. Rule 72(T) is a part of the IRS code that allows you to access funds from your retirement account(s) without being penalized and having your funds eroded away because you took money too early.
After all, it is your money and funds as the funds are using it ever month to maximize their own returns, you would be able to do the same thing for yourself, right? But, before you decide to take the leap into using this as a retirement strategy, there are a few things you muse consider. Being that the rule can be quite complex and requires the right calculations and precision in the numbers, it is best that you evaluate the following:
First, determine the specific purpose for which you need or would like to withdrawal the funds. The purpose and intent may bring up other options that could be less risky and better options.
2. Once you know what you want to use the funds for, determine exactly what you will need monthly and annually to fund that specific activity.
3. Once you have determine the first two steps, you will then want to run the numbers by your Financial Advisor or Financial Planner to make sure you have run the numbers correctly have covered all your basis. Having another set of eyes to help you compare and contrast the best option that is right for your needs is a great way to "measure twice and cut once."
4. After that 3rd step, you will then want to run your plans and the numbers you came up with by your Accountant or another highly experienced tax professional so they can help you determine any potential tax exposures or obligations you had not considered. Your Accountant or Tax Professional is going to look at IRS Rule 72(T) and how it applies to you based on the following:
a. Your Tax Bracket.
b. Your current age, because your current age and when you reach 59 1/2 will determine how the numbers are calculated and how long you will be required to take a specific amount of money for a determinate period of time, which is either a minimum of 5 years or until you reach 59 1/2, which ever is longer. For example, if you retire at 45, then you will be required to take out a minimum of x amount of dollars that have been predetermined for 14 years (15 years) based on when you first started taking the withdrawals.
c. There are 3 ways to determine this number and it has be done precisely to make sure you have the funds to reach the designated date at which you are no longer required to take out the periodic payments annually.
The 3 different calculations are 1) RMD's which calculated the balance of your retirement account /your life expectancy = SEPP or your Substantially Equal Periodic Payments that will need to be withdrawn annually over the predetermined period of time, 2) the Fixed Amortization Method calculates payments that are higher the regular RMD's using a formula which also takes in to account the balance of your retirement account and multiplies by the interest rates which is the assumed interest rate for the specific retirement account and using a formula, dividing that number by the calculated Life Expectancy which will equal the number of payments that will need to be allocated over a specified period of time so you are not penalized with back fees, 3) there is the Fixed Annuity Method which uses a formula to determine your required payments by taking your retirement account balance multiplied by your accounts Annuity Factor (age, your sex, and assumed Rate of Return on your account), and then divide that number of your life expectancy to determine your fixed payments over time.
This is why it is important to take some time to determine exactly what you are wanting to do, what you need to accomplish this financial goal or planned activity, and from which account(s) would be best utilized to take advantage of and maximize the benefits of using IRS Rule 72 in your favor. This includes having the right team in place with the right experience. Before you get to this point and are still in your working years, let Unwind Financial Consulting Services help you achieve that next step by helping you set goals, plan ahead, and ensure your financial house is in order, today!