Persons who take early retirement plan distributions, prior to age 59½, are normally subject to paying the income tax plus a 10% penalty.
In 1989, IRS modified their rules to create an exception. This is known in the investment industry as Rule 72(t). The 1989 rule (89-25) was modified in 2002 (2002-62).
IRS Rule 72(t) Key Points:
- This IRS rule requires substantially equal payments for five years or to age 59½, whichever is longer.
- Government guidelines dictate the distribution amounts.
- This rule requires calculations using complex formulas and factors that are prescribed by the IRS.
- Calculations are very complex and require specialized software.
- Calculations use IRS life expectancy tables.
- Calculations use the retiree’s birth date.
- Calculations use a reasonable interest rate that was 8% in the decade of the 1990’s and has become a calculated rate today.
- Approved distributions were calculated using the following three methods:
- Minimum distribution method
- Amortization method
- Annuitization method
- Amortization and Annuitization methods usually predict that future account values will decline.
- Investment professionals usually recommend that those considering taking a 72(t) distribution consult with their tax professional prior to taking distributions.
The two documents that follow are examples of the backdated reports we can prepare. These recreations are run using either 1989-25 or 2002-62 Rules. Further, we can offer expert testimony regarding 72(t) issues.
*This information is not legal or tax advice. It is for general information purposes only. Securities Litigation Support, LLC is not a legal or an accounting firm.