How to Avoid the 10% IRS Early Withdrawal Penalty

By | May 30, 2017

Have you ever wondered how you could get money out of your traditional IRA pre-59.5 years of age without paying the 10% early withdrawal penalty? There is a little known section of the IRS tax code: Section 72t that allows you to take substantially equal periodic payments (SEPP) on an annual basis before the age of 59.5 without paying the 10% early withdrawal penalty. The IRS stipulates you take money out of your IRA for five years or until the age of 59.5, whichever is longer.

According to the IRS, funds contributed to investment vehicles such as IRAs or non-qualified annuities are locked into the investment until the money matures. Money in these accounts mature when the investor turns 59.5 years of age. Any and all funds taken out of these accounts prior to 59.5 are subject to a 10% early withdrawal penalty fee in addition to any income tax incurred by the withdrawal. Section 72t essentially allows investors to forgo the 10% fee by making SEPPs.

This allows investors access to those dollars for many differing personal financial reasons and mitigates the size of their traditional IRA, thereby decreasing their RMD (Required Minimum Distribution) after age 70.5.

Keep in mind that any distributions coming out of your traditional IRA will count as provisional income, possibly increasing the likelihood your Social Security may be taxed, contrary to Roth IRAs, which have no taxation from distributions and are free from federal, state and capital gains tax as long as you are over 59.5 years of age. Roth IRAs also have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.

Set up SEPPs Before Retirement

In order to calculate the proper balance when taking advantage of the 72t you may need to act before retirement. By postponing until retirement you may risk tax rates being higher than they are today. And you may find you have to shift larger amounts of money because your assets by that time will have grown and compounded.

When you shift assets during retirement, the additional provisional income causes your Social Security to be taxed.

The amount you can withdraw by way of a 72t fluctuates based on a number of criteria, including the age of the account holder and interest rates. All of your future payments will be exactly the same until the SEPP is no longer in effect. It is important to know the amounts you have calculated will be the exact figures for your payments from the account. You cannot name your own amount to take each year.

How to Raise or Lower SEPP Amount

The way to impact the amount of the payment is to adjust the balance in the IRA. If you have more than one IRA available, you can transfer funds into one account to increase or decrease your payment. This must be done before establishing the SEPP. You cannot deposit money into or remove funds from your IRA while the SEPP is in place other than the required payments from the account each year. Any deviation from the prescribed payments will cause the SEPP to be canceled which can result in negative consequences.

Exceptions to the 10% Early Withdrawal Penalty

The following are specific circumstances that will allow exceptions to the 10% penalty under IRS Section 72t:

  1. Age 59.5
  2. Upon death paid to the beneficiaries
  3. Disability
  4. Series of substantially equal periodic payments (SEPP)
  5. Certain qualified medical expenses
  6. Health insurance premiums
  7. Qualified higher education expenses
  8. First-time home purchase


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