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.

This Financial Calculator requires a Browser with Java™ applet Support. If you are seeing this message you will need to download SUN's Java™ Plug-in. This can be done simply, and automatically, by clicking the link below:

Get the Java™ Plug-in!

Definitions

*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:

  • 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 or your joint life expectancy.

  • 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 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.

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:

TableDescription
Single Life ExpectancyThis 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 ExpectancyThis is also a non-sex based life expectancy table for determining joint survivorship. Married couples have the option of choosing this method as long as their spouse is the beneficiary on the retirement account. You are not required to choose this table if you are married, it is only an option.
Uniform LifetimeThis 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 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.




More Calculators