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Tax & Penalty-Free Withdrawals From IRAs Before 59 1/2 are Possible

by smeneshi - Nov 25, 2014

Many of you have benefited from saving away your hard-earned money into a 457 plan. The 457 plan, like ALL retirement plans, has its advantages and drawbacks. One of the drawbacks of a deferred comp plan is that you have to separate from service to withdraw your funds (there are a couple of exceptions to this rule such as an emergency withdrawal) at which time you are taxed on the amount of the withdrawal.

For this reason, a lot of you have decided to fund a Roth IRA, which lets you pull your contributions at any time without tax or penalty. This is because Roth IRA contributions are made after-tax, so Uncle Sam doesn’t care if you take those dollars back before you turn 59 ½. He will slap you with income tax and a 10% early withdrawal penalty on gains you pull out before age 59 ½ (there are exceptions to this rule also).

But what if you’ve contributed to a Traditional IRA? Is it possible to get your hands on your money before the age of 59 ½ without tax and/or penalty?

There are two little-known exceptions relating to Traditional IRAs that let you pull money before age 59 ½ without either paying taxes, penalties, or both.



The first exception, called a 72t distribution, is a section of the Internal Revenue Code that allows for penalty-free tax treatment of IRA withdrawals before the age of 59 ½. These distributions are also known as a Series of Substantially Equal Periodic Payments.

To take advantage of the 72t rule, you and your financial advisor must calculate the amount of annual distributions from your Traditional IRA according to a specific formula. In order to avoid the 10% early distribution penalty, once you trigger 72t distributions, you need to keep withdrawing the appropriate amount out for five years or until you reach age 59 ½ – whichever is later.

There are three ways of making a Series of Substantially Equal Periodic Payments, all of which are based on your IRA balance and current age. These methods are the following:

  • Required Minimum Distribution method
  • Fixed Amortization method
  • Fixed Annuitization method

Under the Fixed Amortization and Fixed Annuitization methods, the amount of your distributions cannot be changed without facing harsh tax consequences. All of your distributions will be subject to a 10% early distribution penalty and you will have to pay interest on any unpaid tax or penalty, calculated from the date of all distributions to the date you altered your Series of Substantially Equal Periodic Payments. With the RMD method, you’re able to change your distributions amount one time if needed. It’s vital that you consult with your financial advisor to figure out which method of withdrawal is most appropriate since any missteps can really hurt you.



 Withdrawals from Traditional IRAs are usually taxable, but a special IRS rule allows you pull money from your T-IRA without tax or penalty as long as the funds are rolled over to another IRA or placed back into the same account within 60 days of the withdrawal. The 60-day rollover rule also applies to Roth IRAs. To prevent IRA investors from abusing this rule, you can only use the 60-day rollover rule once every 365 days from the first distribution. Starting January 1st of 2015, this rule applies per taxpayer, not per IRA so an investor can only do one rollover across all of his or her IRAs within any 365-day window. Keep in mind that for the 60-day IRA rollover rule, the 365-day window begins on the date of the distribution, not January 1st.

The 60-day rollover rule only applies to rollovers where the individual actually takes possession of the money, so for a trustee-to-trustee transfer of an IRA, since the funds are never received by the investor, no such rule applies. You can make as many trustee-to-trustee transfers per year as you would like.

So what are some reasons why you would take advantage of the 60-day rollover rule? As an example, let’s say that you need the funds for a short-term, temporary “loan” to finance a new house. If you need $50,000 for a down payment on a home while you wait for your current home sale to close, you can pull money from you IRA, use it to close on your new home, then replace those dollars once your old home sells.

When using either of the special IRA distribution rules, you have to use the highest degree of caution. For example, even being just one day late when rolling over funds from one IRA to another, or not withdrawing the exact amount while participating in a Series of Substantially Equal Payments could rain down some heavy income taxes and penalties on you. Even though using these strategies can be very beneficial, it’s best that you consult with an experienced and competent financial advisor and tax accountant before taking action.  Public Retirement Planners can inform you of the rules that apply to IRA rollovers.


Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

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