72(t) Calculator

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72(t) Calculator: Early withdrawals from retirement accounts

72(t) distributions refer to Section 72(t) of the Internal Revenue Code, which deals with the 10% penalty tax on early distributions from retirement plans and IRAs. Generally, withdrawals from IRAs and retirement plans prior to attaining age 59 1/2 are subject to a 10% early withdrawal penalty tax. However, under Section 72(t) there are ways for you to avoid the 10% penalty, provided certain criteria are met. Use this calculator to determine your allowable 72(t) distribution and how it can help fund your early retirement or meet an immediate financial need.

Please contact us today if you have any questions or need further assistance.

Definitions

*April 17th, 2002 and again on October 3rd, 2002 the IRS issued rules that affected 72(t) distributions. This calculator incorporates the new rules, which are described in detail below. For more information regarding these changes please see Revenue Ruling 2002-62 on www.treasury.gov.

Substantially Equal Periodic Payments (SEPP)

The rules for 72(t) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy, or the joint life expectancy of you and your designated beneficiary, in order to avoid a 10% penalty tax on amounts you withdraw before age 59 1/2. Generally, if your payments are modified (except for death or disability) before the longer of five years or age 59 1/2, you will be subject to the 10% penalty tax plus interest.

Required minimum distribution method: This is the simplest method for calculating your SEPP, but it also produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
Fixed amortization method: With this method the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy or your joint life expectancy. Distributions using this calculator are based on a single end-of-period annual systematic withdrawal.
Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per year beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer (or the joint lives of the individual and beneficiary). For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8% percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the Annuity 2003 Mortality Table, which is a non-sex based mortality table, and an acceptable Mortality Table for the IRS. Please note that your annuitized SEPP can be based on your life expectancy, or the joint life expectancy of you and your beneficiary.
The use of the Annuity 2003 Mortality Table was introduced in the Revenue Ruling 2002-62 on October 3rd, 2002. Prior to this ruling the UP-1984 Mortality Table was used to calculate your annuitized distribution. The new mortality table has been updated to accommodate longer life expectancies.

In addition, Revenue Ruling 2002-62 allows you to change your distribution method one time without penalty from the Fixed Annuitization or Fixed Amortization methods to the Required Minimum Distribution method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception please see Revenue Ruling 2002-62 on www.treasury.gov.

Account balance

This is your initial account balance, which can be selected from any of the daily valuations from December 31st of the preceding year until the day of your first distribution.

The account balance by age, as shown graphically, is determined by adding investment gains for twelve months to the previous year's balance using the Reasonable Interest Rate, compounded annually, and then subtracting the current year's required annual SEPP distribution.

Your age

This is your current age. Use the age you will turn on your birthday for the year you are receiving the distribution.

Beneficiary age

This is your beneficiary's age. Use the age your beneficiary will turn on their birthday for the year you are receiving the distribution. This entry is ignored if you do not use your joint life expectancy to calculate your SEPP.

Life expectancy tables

There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the "Fixed Amortization" or the "Required Minimum Distribution" methods. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Fixed Annuitization or Fixed Amortization methods to the Required Minimum Distribution method, see SEPP definition for more details). The three life expectancy options are:

Table	Description
Single Life Expectancy	This is a non-sex based life expectancy table. This table does not use your beneficiary's age to calculate your life expectancy. The life expectancy will be based upon the age you reach in the year of the distribution. This table can be used by all account owners regardless of marital status or selected beneficiary. Choosing single life expectancy will produce the highest distribution of the three available life expectancy tables.
Joint Life Expectancy	This is also a non-sex based life expectancy table for determining joint survivorship. The life expectancy will be based upon your age and the age attained by the oldest designated beneficiary of the account in the year of the distribution.
Uniform Lifetime	This is a non-sex based table developed by the IRS to simplify minimum distribution requirements. The uniform lifetime table estimates joint survivorship, but does not use your beneficiary's age to determine the resulting life expectancy. The life expectancy will be based upon the age you reach in the year of the distribution. This table can be used by all account owners regardless of marital status or selected beneficiary.

Reasonable interest rate: Generally speaking, this is any interest rate that is not more than 120% of the Federal Mid-Term rate for either of the two months immediately preceding the month in which the distributions begin. It is important to note that the associated law that created the 72(t) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments throughout your lifetime by using an unreasonably high interest rate.; 72(t) withdrawals setup prior to January 2003 had some flexibility in the choice of the reasonable interest rate to use. However, in 2002, the IRS issued new rules stating that only rates not more than 120% of the Federal Mid-Term rate would be considered reasonable. For example, in January 2003 the Federal Mid-Term rate was 3.43%. This means any interest rate not more than 4.12%, which is 120% of 3.43%, would have been acceptable to use for 72(t) withdrawals commencing in February or March 2003. If an individual wants to use an interest rate more than 120% of the Federal Mid-Term rate, then a Private Letter Ruling should be requested.