Thinking about drawing out your retirement savings early?
That’s a good sign. Taxes will only be higher in the future.
There is a little known IRS rule that allows IRA savers to withdraw money before they are 59 ½ without that pesky excise tax penalty.
The rule is called 72t.
Here’s a brief summary of how it works.
The IRS says you can take money out of your IRA, before 59 ½ by using a special table that divides your retirement savings by your life expectancy.
Now here’s the catch.
If you decide you want to start taking income penalty free, you need to do it for at least 5 years or age 59 ½ or whichever is greater. So once you start, you need to keep taking the money out even if your situation changes.
For most people, this is not a big deal.
Most people who start the 72t withdrawals keep them going.
They pay the normal income taxes, but have no penalty tax!
It’s the best way to set your money free if you are not yet 59 ½.
Here’s an example…
Joe is 45 years old and has 100,000 in his IRA account. He wants to use the money from his IRA account to fund another investment. Using the IRS formula Joe’s approximate annual penalty free withdrawals would be around $3839.
He would then have to make that $3839 withdrawal every year until he was 59 ½. If he changed it during that time period, he would cause all the withdrawals to be taxable.
Doesn’t it seem like IRAs are filled with IRS tax traps?
What do you think?