IRS 72(t) Plan

IRS Building

 

It’s difficult to read but here it is:

Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable.”(Source IRS.gov).

 

So what does that mean, before age 59 ½ a person can withdraw equal payments from their IRA for a period no shorter than five years or until they are 59 ½ without incurring a 10% penalty. (Please consult with a tax advisor before withdrawing funds from your qualified plan.) You still owe the tax, but you don’t incur the penalty.

Let’s look at an example.

Don is fifty years old and has $300,000 in his IRA. Don is worried about future tax rates but doesn’t want to pay the 10% penalty. Don contacts a Structured Wealth Strategies Agent and finds out that his maximum distribution is $14,660. The maximum 72t distribution of $14,660 per year was calculated by the “fixed amortization method” at 3.25%. To avoid penalties, payment must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59 1/2, whichever is longer.

Don elects the 72t for the next 10 years to fund his account. At age 60 Don now has approximately $166,000 in cash value in his account that is now TAX-EXEMPT. His IRA is still worth $236,297, which is taxable.

Last but not least, he has a death benefit that would go to his family of $536,307.*

If you think that taxes are going up, this is a no-brainer. A Structured Wealth Strategies Agent can guide you through this process to see if it is right for you.

*Other possible distribution methods were available. This is a hypothetical illustration, contact a Structured Wealth Strategies Agent for an illustration.