What is 72T?

Rule 72(t) actually refers to code 72(t), section 2, which specifies exceptions to the early withdrawal tax that allow IRA owners to withdraw funds from their retirement account before age 59½ as long as the SEPP (Substantially Equal Periodic Payment) regulation is met. These payments must occur over the span of five years or until the owner reaches 59½, whichever period is longer.

  • A substantially equal periodic payment plan allows individuals who have invested in an IRA or another qualified retirement plan to withdraw funds prior to the age of 59½ and avoid income tax and early withdrawal penalties. Typically, an individual who removes assets from a plan prior to age 59½ will face taxes on that withdrawal and a 10 percent penalty. With substantially equal periodic payments, the funds are placed into a SEPP plan that pays the individual annual distributions for five years or until he or she turns 59½, whichever comes later.
  • Because the IRS requires individuals to continue the SEPP plan for a minimum of five years, this is not a solution for those who seek penalty-free short-term access to retirement funds. If you cancel the plan before the minimum holding period expires, you will have to pay the IRS all the penalties that were waived on amounts taken under the program, plus interest. SEPP plans are also permitted with money from employer-sponsored qualified plans, such as 401k’s, but you cannot currently work for the employer that sponsored the plan.

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