What is Pre 59 ½ Withdrawals (IRS Rule 72)?
Pre 59 ½ withdrawals, guided by IRS Rule 72, pertain to taking funds from retirement accounts such as 401(k)s, IRAs, and other tax-advantaged accounts before reaching the age of 59 ½. Typically, these withdrawals incur a 10% early withdrawal penalty in addition to regular income tax on the distribution amount. However, IRS Rule 72(t) outlines exceptions that allow penalty-free withdrawals if certain criteria are met.
One notable exception under Rule 72(t) allows individuals to take what is known as Substantially Equal Periodic Payments (SEPPs). SEPPs require the account holder to commit to a series of periodic withdrawals based on a life expectancy calculation method. The individual must continue these withdrawals for a minimum of five years or until they reach age 59 ½, whichever is longer. By adhering to SEPP guidelines, individuals can avoid the 10% penalty, though the withdrawals are still subject to income tax.
Additional exceptions for penalty-free withdrawals before age 59 ½ include cases such as permanent disability, certain medical expenses exceeding 7.5% of adjusted gross income, or paying for qualified higher education expenses. For example, an individual facing high medical bills might use Rule 72(t) exceptions to access funds without penalty, alleviating financial strain in a time of need.
While early withdrawals can offer immediate financial relief, they also reduce the retirement account’s long-term growth potential. Therefore, it is essential to consider both the immediate benefits and the future impact of accessing retirement funds early, especially when planning for retirement security.
