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Rule 72(t)

Rule 72(t) is a provision in the United States Internal Revenue Code that allows for penalty-free withdrawals from an individual retirement account (IRA) before the age of 59.5. This rule applies to other tax-advantaged retirement accounts as well, such as 401(k)s and 403(b)s.

Normally, if an individual withdraws money from these types of accounts before reaching the age of 59.5, they would face a 10% early withdrawal penalty. However, Rule 72(t) provides a way to avoid this penalty if the individual can commit to taking substantially equal periodic payments (SEPPs).

These SEPPs must be calculated based on the life expectancy of the account owner and must continue for at least 5 years or until the account owner reaches age 59.5, whichever period is longer. The amount of these payments can be calculated using methods approved by the Internal Revenue Service (IRS).

It’s important to note that while Rule 72(t) distributions can help avoid the 10% early withdrawal penalty, the distributions are still considered taxable income and will be subject to regular income taxes. Also, changing or stopping the payments before the end of the prescribed period can result in retroactive penalties.

As always, it’s a good idea to consult with a financial advisor or tax professional before deciding to take 72(t) distributions, as it can have significant impacts on your retirement savings and tax situation.