Those considering early retirement will want to be aware of IRS Section 72t, which now makes it possible for investors to take out proceeds before the age of 59 1/2 provided certain exceptions are met.
Taking early retirement has been a topic of increasing interest lately as more workers, fed up and frustrated with a sluggish economy, contemplate the relative benefits of taking out distributions from their individual retirement accounts and living off Social Security, a retirement package, and their retirement investment savings instead. Typically, taking distributions out of an IRA account would come with stiff penalties, including a 10 percent penalty on all withdrawals made before age 59 1/2 plus full taxation on the distributions withdrawn. That's where IRS Section 72t comes into play.
IRS Section 72t is a way around the 10 percent taxation that early distributions or withdrawals from an individual retirement account might otherwise incur. For a variety of reasons, the IRS recognizes sometimes it becomes necessary or desirable to take out distributions or withdrawals before age 59 1/2, and specifies under what conditions the early withdrawal penalties might be waived.
As long as one of the specified exceptions is met, the distributions taken from an IRA account will not be subject to the 10 percent early withdrawal penalty. Exceptions can include reaching age 55 and receiving a distribution from another type of retirement plan or account at that time, having medical expenses that account for more than 75 percent of your adjusted gross income that are unreimbursed by any employer-sponsored or individual healthcare policy, disability, or if the recipient of the disbursal or withdrawals receives it as part of being a beneficiary on a deceased's will or beneficiary forms.
Other reasons for enacting IRS Section 72t in regards to IRA withdrawals prior to age 59 1/2 include the recipient receiving annuity disbursements, that they have higher education expenses that are more than the amount they withdraw from the IRA or plan, that the funds being withdrawn are intended solely for use to build or remodel a home (only for first-home owners and the amount withdrawn cannot exceed $10,000), or that the withdrawal is required to manage excess employer or employee contributions into a plan.
Additional qualified exceptions under IRS Section 72t include waiving of the 10 percent penalty if an IRS levy forces the distribution, if the distribution is a qualified reservist withdrawal, or if the distribution is reducing excess IRA contributions. There are certain other exceptions as well, which can be explored on the IRS website. It is important to determine in advance whether a distribution or withdrawal meets the requirements under IRS Section 72t, or there is no way to reverse assessment of the 10 percent early withdrawal penalty.