|72(t) Calculator: Early withdrawals from retirement accounts|
The results and explanations generated by this calculator may vary due to user input and assumptions. New York Life Insurance Company does not guarantee the accuracy of the calculations, results, explanations, nor applicability to your specific situation. We recommend that you use this calculator as a guideline only and you should ultimately seek the guidance of an experienced professional.
*April 16th, 2002 and again on October 3rd, 2002, the IRS finalized rule changes that affected 72(t) distributions. This calculator incorporates the new regulations, many of which are described in detail below. For more information regarding these changes please see 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. These 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:
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 This is your account balance as of the close of business on December 31st of the preceding year. The IRS has decided that the balance on this date should be used for 72(t) distributions with one important exception: this amount is increased by any contributions made for the preceding year after December 31st.
Life expectancy tables
This is any rate less than 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distribution begins. For January 2005, 120% of the Federal Mid-Term rate was 4.53%.
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 the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments (SEPP) 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. You are now required to use a rate that is no more than 120% of the Federal Mid-Term rate.