Question: I understand there is a thing called 72t that allows a person who quit work after 55 to avoid the 10% penalty for taking a draw from a 401k. I'm almost 58 and would like to hang it up this year. How does this work? Thank you! Walter, Helena, MT
Answer: First, a brief definition since not everyone is aware of the IRS's Rule 72T. You can't take money out of a traditional IRA before age 59 Â½ without paying a 10% penalty on the amount you withdraw. However, as you say, you can escape the 10% penalty with Rule 72T.
Here is the basic idea: You commit to a fixed payout until you reach age 59 Â½ and for a minimum of 5 years (whichever comes last). That means in your case if you start making withdrawals at age 58 you'll have to stick to the schedule until you're 63 years old. The IRS offers you three options for taking your money out. Once you've passed the minimum requirements for time and age with a 72T withdrawal you can then change your payment schedule.
Remember, the income you take out of the IRA during withdrawal is taxable at your ordinary income tax rate. And if you change the schedule or run out of money in the IRA during the commitment period you will be assessed a penalty on the sums you've already taken out. That's why I strongly suggest to anyone thinking about going the 72T route to work with a professional. My own feeling is that a 72T is a very risky strategy for most people. It creates a genuine risk of running out of retirement assets early.