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Withdrawing money from your IRA before you get to 59 ½ years old will lead to a hefty penalty called the 10% early distribution penalty tax. This means you will be losing money and so it is important to use the right approach to avoid such penalties.

The 72(t) payments code which is also known as SEPP payments is one of the best avenues to use, but you must be quite considerate because a specific schedule has to be followed when withdrawing money. Fortunately, the IRS provides three methods that people can use to determine their specific withdrawal schedule. Here are the factors to consider.

You should avoid deviating from your payment schedule

Once you start taking 72(t) payments, you have to strictly adhere to the payment schedule for a minimum of five years or at least until you reach 59 ½ years old. There is however an exception for people that are disabled or in case you meet an untimely demise. If you deviate from your payment schedule, then the IRS will slap you with penalties on all withdrawals.

Which 72(t) option best suits you when considering early IRA withdrawals?

Try as much as you can to avoid withdrawing from your IRA if none of the penalty exemptions apply to you or if you are not backed up to a corner by debt. However, if you do choose to move forward with the withdrawal, you have three options to choose from:

  • Annuitization- This is similar to how insurance companies or pension schemes determine how much to payout. An annuity factor is used to divide the last reported balance.
  • Amortization- This option gives you a withdrawal schedule on an annual basis. An interest rate is applied to the last account balance reported.
  • Required Minimum Distribution (RMD)- The IRS provides a divisor table where the divisor changes depending on a person’s change. This divisor is used to divide your last reported account balance in the previous year to determine an individual’s distribution.

Once you have selected the option which you believe is best suited for you, then you can use the online 72(t) Calculator to determine the schedules. You can even calculate for all three options to find the most favorable withdrawal option.