Required Minimum Distribution for Early IRA Withdrawal
When you take money from your IRA before age 59 1/2, you normally pay a penalty of 10 percent. But when making early withdrawals from your account, you may be able to avoid this penalty by making withdrawals under the exception in IRS rule 72(t).
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Process
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Withdrawals made before age 59 1/2 are made under IRS rule 72(t). You must notify your plan custodian that you wish to take IRA withdrawals from your account under this exception. The plan custodian sends you the proper distribution forms to fill out. You must adhere to the withdrawal guidelines, which require that the withdrawals be equal and substantial. The IRS defines "equal and substantial" to mean that the withdrawals must be based on your life expectancy at the age you start making withdrawals. The withdrawals must also continue until age 59 1/2 or for five years, whichever comes later. You may use the actuarial tables in Appendix A of IRS bulletin 2002--42, the single life expectancy table in section 1.401(a)(9)--9, Q&A--1 of the income tax
regulations or the joint and last survivor table in section 1.401(a)(9)--9, Q&A--3 as a guideline for your withdrawals.
Advantage
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The advantage of the actuarial table is that it shows the amount of money you should safely take based on your age. While it is never certain when you will die, the actuarial table gives you an estimate of how long your savings will last. You also are assured of an easy calculation so that you take the correct amount and do not withdraw too little. You must adhere to the rules for withdrawals under the 72(t) exemption or you will be assessed a 10 percent penalty for early withdrawals.
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Disadvantage
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When you start taking money early from your IRA, you risk draining your account before your death. Unless you are consistently earning money in your IRA, you may not have enough to sustain you throughout your retirement. Additionally, once withdrawals start, you cannot stop them for at least five years and you may be required to wait longer if you turn 59 1/2 after the five-year limit.
Consideration
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Withdrawals under rule 72(t) provide an alternative to the normal rules for retirement, but come with some risks. Unless you have substantial retirement savings, making withdrawals under this rule could prematurely deplete your retirement account. If you do have sufficient savings, however, this option can allow you to retire whenever you want, provided you follow the rules of the exception.
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