What’s the most common piece of retirement advice you’ve ever heard?
I bet it has something to do with tax advantaged retirement savings. Most people are inundated with voices telling them to start saving early and take advantage of tax deferrals. It’s solid advice. Saving tax deferred money through IRAs, 401(k) plans, and other retirement vehicles is a wonderful way to grow your wealth over time. The downside? Those pesky withdrawal penalties. The IRS will typically ding you 10% if you withdraw from these accounts before turning 59 1/2. And if you’re considering an early retirement, this can pose a problem. Fortunately there are loopholes, including taking 72t distributions in substantially equal periodic payments.
Tax Advantaged Savings
The IRS wants us to save for retirement. By allowing us to defer taxes in retirement accounts like IRAs, Roth IRAs, and 401(k)s, the government is essentially begging us to improve our own financial futures.
The catch is that we have to keep our money in these accounts until we reach 59 1/2. Otherwise we’re hit with a 10% penalty, in addition to income tax.
The IRS does provide 9 ways for us to take withdrawals without incurring the penalty:
- Take withdrawals after 59 1/2
- Roll withdrawals into another IRA or qualified account within 60 days
- Use withdrawals to pay qualified higher education expenses
- Take withdrawals due to disability
- Take withdrawals due to death
- Use withdrawals for a qualified first-time home purchase up to a lifetime max of $10,000
- Use withdrawals to pay medical expenses in excess of 7.5% of adjusted gross income
- As an unemployed person, take withdrawals for the payment of health insurance premiums
- Take substantially equal periodic payments pursuant to rule 72t
But it you’re seeking to retire early, you probably don’t want to wait until 59 1/2. And if this is you, most of the loopholes the IRS provides will not apply.
Except for the final loophole, that is. Rule 72t allows you to take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments” over your lifetime. Here’s how: