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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

  • Writer's pictureClay Reynolds

Rule 72(t): Withdraw early from your retirement account without a penalty

What is rule 72(t)?

Rule 72(t) refers to a section of the Internal Revenue Code that gives parameters to follow to make early withdrawals from retirement accounts without penalties. The eligible retirement accounts include traditional IRAs, Roth IRAs, 457(b) plans, 403(b) plans, and 401(k) plans. However, Roth IRAs are subject to different rules, meaning you may not need to execute a 72(t) to get funds penalty-free.

 

The exception for an early withdrawal penalty can only be utilized if the taxpayer follows the 72(t) requirement of substantially equal periodic payments (SEPPs). The number of payments needed to fulfill this requirement varies with age. SEPPs refer to making equal periodic withdrawals from your retirement account. These funds must be withdrawn according to a specific IRS schedule, and the IRS has three different methods for calculating how much your withdrawal amount should be. The 72(t)-payment schedule must be five years or until you reach age 59 ½ (whichever comes later), which means your payment schedule will be at least five years.

 

Example: If you are age 50 ½, you would have to make substantial equal payments for nine years until you reach age 59 ½.

 

Rule 72(t) payment calculation

Fixed annuitization method

This is the most complex method for calculating SEPP. The annual payment is calculated by factoring your total account balance, an annuity factor provided by the IRS, the federal midterm interest rate, and the account owner's life expectancy. This method differs from the other two as the account owner cannot choose between the different life expectancy tables. This causes the fixed annuitization method to only be affected by interest rate because it is restricted to a specific life expectancy table.


Fixed amortization method

This method calculates the amount to be distributed annually by amortizing the account balance over the single life expectancy, the uniform life expectancy, or the joint life expectancy with the oldest listed beneficiary. The payments remain the same over the withdrawal period, and recalculating is unnecessary. The fixed amortization method is unique because it is affected by both life expectancy and interest rates.


Minimum distribution method

This method takes a dividing factor from the IRS’s single or joint life expectancy table and divides the retirement account’s balance. This varies significantly from the amortization method as the annual withdrawal payments are likely to vary yearly. The payments from this method are the lowest possible amounts that can be withdrawn.

 

Here is a brief overview of the different life expectancy table options:

  • The Uniform Table

    • Applies to unmarried account holders, married account holders whose spouses are not more than 10 years younger, and married account holders whose spouses aren’t the sole beneficiaries of their accounts

  • The Joint and Last Survivor Expectancy Table

    • Applies to account holders whose spouses are more than 10 years younger and are also the sole beneficiaries of the account.

  • The Single Expectancy Table

    • Applies to beneficiaries

 

Conclusion

Executing a 72(t) should be a last resort when there are no longer other options to exercise. Something to keep in mind is that you MUST be very diligent with monitoring your withdrawals.  If you miss a withdrawal or don’t take the proper amount, you will be assessed all your penalties.


This should not be used as an emergency fund as it can significantly impact your future financial situation in retirement. If you need money from retirement accounts and want to avoid the 10% penalty on early withdraws, a 72(t) might be something to investigate. Remember that withdrawals that follow the 72(t) criteria are still subject to the account holder’s normal income tax rate.

 

Most 72(t) options are executed for someone retiring from their employer earlier than 59 ½ and looking to replace their income with interest, growth, and principal from their 401(k), IRA, or retirement asset in a consistent and repeatable manner. Just like you would expect a paycheck each month from your employer, a 72(t) option can create that paycheck from your hard-earned savings while avoiding the dreaded 10% penalty that comes with a withdrawal from a retirement account before 59 ½. In our opinion, the IRS is giving the person who has done a tremendous job of saving the option to retire before the standard 59 ½ retirement date. This should not and cannot be used for someone looking for a one-time access to their funds.


If you have questions or want to see what a 72(t) looks like for you, contact your financial advisor. They would be able to show more in-depth what the substantially equal periodic payments would look like for your situation and how long you would need to take those. If you don’t have a financial advisor, we have a team ready to help answer questions at Whitaker-Myers Wealth Managers.

Comments


Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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