# 72(t) Distribution Impact Calculator

## 72(t) Distribution Impact Calculator

Retirement programs, like 401k and 403b, have a penalty to discourage plan holders from accessing their funds before their 59th birthday. However, there is an approved process you can use to get early payments from tax-deferred savings, called 72(t) distributions. By adding a few of your details to the calculator, like your age and account balance, you can figure out the dollar amount you’d be entitled to. The system will also model what impact these withdrawals will have on your total savings. From your results, you should be able to make an informed decision regarding early retirement. If you continue reading, you can learn about the distribution methods and how to interpret your results.

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Is an early retirement right for me?

Whether you are a new or seasoned worker, it’s likely you have already considered when you would like to retire. While it’s nice to leave the workforce sooner then later, there is a lot to think about before making the transition. You’ll need to forecast your needs for many years (or decades) into the future to ensure your security.

Saving tax-deferred money through retirement programs is a great way to prepare for retirement. But, as most plan holders will tell you, there is 10% surcharge for early withdrawals. If you want to retire early (before the age of 59.5), taking money from your account can get expensive.

Even if you have been diligent about building up your savings, taxes and penalties could eat up a significant part of your earnings. For many, the result will be between 35% to 49.6% loss of their capital (39.6% income tax rate + 10% surcharge= 49.6% total owing). That’s where 72t distributions come into play.

What are 72t distributions?

There is a provision in tax law, called 72(t), which can grant you early access to your retirement savings. By following the 72t process, you can actually eliminate the 10% early withdrawal penalty. As a result, plan holders get more freedom to begin their retirements.

The provision requires you to take a series of calculated payments, called SEPP (substantially equal periodic payments), until the account or account holder reaches maturity. To reap the benefits of 72t distributions, you'll have to keep taking your payments as set out by IRS guidelines. Then, once the distribution period passes, you have complete freedom to use your earnings.

The first step is to follow an IRS approved distribution method to determine your payments. In the next section, we’ll go over how to do that.

72t distribution methods

If an early retirement still sounds right for you, you're probably curious about your payment allowance. To figure this out, you will need three things:

Your account balance from the previous year A life expectancy factor (LEF) A distribution method

The balance on your account from the previous year should be simple to figure out. If you are unsure, follow up with your plan custodian. Next, you’ll need a divisor from one of three IRS life expectancy tables. The tables are designed for different marital circumstances and are adjusted to your age.

The single life expectancy table is for individuals of all ages. The uniform lifetime table is for spouses that are separated by less than ten years of age. The joint life and last survivor is for beneficiaries separated by more than ten years.

Once you have identified the table and your LEF, you can select a distribution method. There are three you can choose from: required minimum distribution, fixed amortization, and fixed annuity.

Required minimum distribution. The simplest method, but as the name suggests, it results in the lowest yearly payments. This technique divides the balance of your account (from the end of the previous year) by a life expectancy factor from the tables.

Fixed amortization method. The next approach you can amortize your payments according to your life expectancy and an interest rate. You can select any interest rate for the amortization as long as it doesn't exceed 120% of the federal mid-term rate. This method develops the most reasonable fixed amount that can be withdrawn annually.

Fixed annuity method. The final IRS approved distribution calculates annual distributions using an annuity factor (Rev. Rul. 2002-62 Appendix B mortality table, p. 10-11). Account holders may also select an interest rate to get the highest fixed annual payout.

After you’ve determined your distribution method, you'll have to follow the all the 72t rules (in the following section) to avoid recapture taxes. Remember to bookmark this calculator and save it to the home screen of your smartphone. You can return as you near the transition to early retirement, or to re-calculate your RMDs as needed. If you found this page useful, please follow us and promote us on social media by using the share feature.

72t rules and considerations

The IRS is very strict about maintaining consistency and does not offer much leeway for mistakes. Once you begin your annual distributions, you must continue taking payments for 5 years or until you reach the age of 59.5 - whichever comes later. Your payments could be fixed, or subject to change, depending on the method you used.

If you calculated your payments using the RMD approach, you’ll have to re-determine your withdrawals each year (using the same method). If you used amortization or annuity to get your payments, the same dollar amount has to be taken from your account for the rest of your payments.

There is one exception to the 72t rule that will allow you to make a one-time change from the fixed methods (amortization or annuity) to the required minimum distribution method only. In other words, the IRS will only allow you to make one change to take a lesser annual payment from your retirement account.

Beyond that, no activity can take place in your savings. You cannot transfer other funds into your account or take a penny more than your calculated distribution. You can only take your approved 72t withdrawals.

It is easy to make simple mistakes such as withdrawing slightly more or slightly less, forgetting an annual withdrawal, or accidentally taking two distributions in one year. If any deviations occur, apart from the one-time allowable change, all of your distributions will be subject to a 10% penalty and interest back-charged on all your payments.

Once you’ve calculated your first withdrawal, the rest is straightforward. You’ll have to discharge your investments before taking payments and then request the 72t funds from your custodian. As long as you continue receiving your payments under the guidelines set out by the IRS, you shouldn't face any problems. You can take your payments yearly or monthly. For monthly withdrawals, divide your annual distribution by 12.

You will owe taxes on your earnings and thus, should receive the correct form from your custodian at the end of the year, Form 1099-R. In some cases, you may need to file an additional form, Form 5329, to explain to the IRS that your distribution qualifies as a 72t SEPP, so you’re not penalized.

Using the calculator

The calculator is very simple to use. You’ll need to add some details regarding your financial situation to illustrate the 72t payments you can take. Let’s review this together.

Step 1. On the first line of the calculator, add your account balance from the end of the previous year. You can use your keyboard or the arrow features to make this input easier.

Step 2. On line two, select the interest rate for your distributions. The interest rate cannot exceed 120% of the federal mid-term rate, which you can find here. This variable will only be used if you decide to get your payments through one of the fixed methods.

Step 3. Next, you can add the returns you are receiving from the investments tied to your retirement savings. The calculator assumes that once you complete your distributions, you will re-invest your remaining capital at this rate of return. If you do not intend to re-invest the funds, please change the variable to 0.

Step 4. Include your age and your beneficiary's age to the following two lines of the calculator. If you are not married, the information in this field won't be used. Just make sure to select the right life expectancy table in step 6.

Step 5. On the sixth line of the calculator, you can set the payments you would like to receive once your series of 72t distributions are completed. You can identify this figure as a percentage of your account balance to be paid out each year in your retirement. If you just want to find out what impact 72t distributions will have on your savings, leave the variable at 0.

Step 6. Finally, you’ll be required to select a life expectancy table and a distribution method. If you are unsure about the difference between the tables and distribution methods, please review the information in 72t distribution methods.

Step 7. Proceed to your results.