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72(t) and Other Exceptions to the Early Withdrawal Penalty

Estimated reading time: 1 minutes, 48 seconds

Have you heard of the 72(t) rule? Chances are that if you have, it was in reference to substantially equal periodic payments. While those are certainly important to know about, there’s even more to learn about this critical section of the code.

Did you know you can find other exceptions to early distribution taxes within IRC 72(t)?

Many retirement investors have been informed about how substantially equal periodic payments could exempt one from an early distribution penalty. A distribution made before age 59 ½ and made as “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 expectancies) of such employee and his designated beneficiary” would be exempt from tax penalty.

If in a tax-deferred account like a Traditional IRA, the distribution would still be taxed at the owner’s current income tax rate. If in a Roth IRA, the distribution would potentially be tax-free.

But IRC 72(t) covers so much more. Along with the aforementioned 59 ½ rule, this portion of the code also excludes distributions for the following purposes:

  • death,72(t)
  • total and permanent disability,
  • payments to an alternate payee under a Qualified Domestic Relations Order (QDRO),
  • qualified higher education expenses,
  • dividend pass through from an employee stock ownership plan (ESOP),
  • first-time home purchase (up to $10,000),
  • IRS levy,
  • amount of unreimbursed medical expenses (if qualifying),
  • health insurance premiums paid while unemployed,
  • payments to a qualified military reservist called to active duty, and
  • separation of service during or after age 55 (age 50 for certain public safety employees).

So, when an industry professional mentions Rule 72(t), he or she is likely referring to 72(t)(2)(iv). This is the portion referring to substantially equal periodic payments (SEPPs).

However, as you can see, 72(t) covers various other exceptions to the 10% early withdrawal penalty. If you’re under 59 ½, find yourself in one of the above circumstances and are considering a distribution from your IRA, speak with your tax professional about your options.

And if you need to take a distribution from your Kingdom Trust IRA, complete our IRA Distribution Request form. Our team is standing by to answer any questions you have about the form, so don’t hesitate to contact us!

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