Troy Sharpe: One of the more little known ways to access your money inside the retirement account
prior to 59 and a half is called a 72(t) distribution. There are three different methods
to do this, the IRS provides you the formula, you just have to calculate it to see what you'll
receive. That's what we're going to cover today. [music]
Troy: Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner
professional and host to The Retirement Income Show. Now I know a lot of you
would never retire prior to 59 and a half, you just don't know what you'd do with yourself,
but by going through the comments and doing this channel for some time and working with
clients for many, many, many years, I also know many of you do want to retire prior to
59 and a half. If you've heard me ever say it once, you've heard me say it a bunch,
you should be saving money outside of that tax infested retirement account, but still most of you
have not listened to me for 10 years or 15 years. This may be the first time you're ever seeing Oak
Harvest and myself talk about retirement income planning and tax planning, but here's the deal.
If you have all of your money inside that retirement account and you're just fed up
and you want to quit or you want to retire or you've been laid off, and you're stuck because
you're not aware of how to take money out of that retirement account and avoid that 10%
penalty, the 72(t) distributions may just be for you. I want to encourage you to talk
to your CPA or a tax advisor, talk to your financial planner, talk to your financial
institution to help you run these calculations. The purpose of this video is to help you be aware
that this choice exists. Just a quick second to remind you to subscribe to the channel and
hit that bell icon so you can be notified when we're going to upload more powerful retirement
content to help you keep more connected to your money, and also comment down below,
we love to see the comments. There are essentially three ways to calculate what your maximum 72(t)
distribution will be. The required minimum distribution method, the fixed amortization
method and then the fixed annuitization method. Again, talk to your financial institution. We're
going to look at a calculator today, talk to your CPA, but ultimately people want to take
whatever gives them the most amount of income, and there are different formulas for all three
of those ways. The rules. You have to take a series of substantially equal periodic payments
for whichever is longer, five years or until 59 and a half. If you're 45 years old,
then you have to take these equal periodic payments until you're 59 and a half. If you're 57,
you have to take it for five years. It's whichever is longer. You cannot deviate from the schedule.
If you deviate from the schedule retroactively that 10% early withdrawal penalty will be applied
to all of those distributions that you've made. You also will still have to pay
income tax on these distributions. 72(t) is not a way to avoid income tax on your IRA distributions.
prior to 59 and a half. Just to follow properly, you can't avoid the 10% early withdrawal penalty.
The next thing we need to understand is the federal midterm rate. This changes on a monthly
basis. As you are aware, interest rates are pretty low right now so this is a negative
feature to the plan. If we see here, in January of 2021 they were 0.52.
Today, I'm recording this video in December of 2021, they're 1.26.
The law says you have to take a conservative approach to calculating these methods.
The most or the highest interest rate you can use is a 120% of the federal midterm rate.
120% of this is about 1.51%. Next month probably will be a little bit higher. We can see the trend
here as we're experiencing a lot of inflation in the country, typically interest rates are going
to follow. It's not a guarantee, but we see the trends pretty clear over the past few months here.
Once we have determined what the federal midterm rate is and 120% of that, this is
a simple bank rate calculator, bankrate.com. On the surface I trust the numbers that it's
calculating but of course we haven't vetted this. I just Googled it and found it. This is why I say,
"Talk to your CPA." Just I want to give you an idea of how much money we can take out.
The first example we're going to look at here is you have $1,000,000 in your IRA. 1.51
is 120% of the federal midterm rate. You're 50 years old. Don't worry too much about the
beneficiary age right now. The maximum 72(t) distribution is 37,652. You would have to take
that from age 50 to 59 and a half. That is the most you can take out per year. If you're 57,
the maximum 72(t) distribution is 44,187. Now, you have to take that for five years.
These are a series of substantially equal periodic payments for whichever is longer,
59 and a half or five years. At 57, 5 years is obviously longer. This is a simple bar chart
showing the three different methods, the required minimum distribution method, fixed amortization
method, and then the fixed annuitization method. Not a ton of difference. The RMD method is the
least in all three of the scenarios and the other two are pretty similar.
Let's say you have 500,000 in your retirement account and you're 57 years old. The most you
can take out is 22,093 per year. Let's say you have
1.5 million inside your 401(k). The most you can take out is 66,280 at 57. If you're 55, 63,217
so you get the point. This is bankrate.com.
There are other calculators on the internet. I believe we may even have one on our website,
but do the calculation, talk to your CPA and understand that you have to take them
for five years or 59 and a half, whichever is longer. You cannot deviate from the schedule.
You still will owe income taxes on these distributions, but you will avoid, if done
properly, the 10% penalty. If you know someone who wants to retire prior to 59 and a half, friend,
family member, share this video with them. Also as always, hit that subscribe button, the little bell
icon, so we can continue to deliver you powerful retirement content to help you be more informed
and more connected to your money. [music]