Differences Between 72t and Rule of 55
You may have heard of 72(t) and the Rule of 55 as methods by which you can access your retirement funds if you retire early. However, you might wonder how they differ. Each method varies in the age at which you can start making withdrawals and the associated requirements to do so.
The 72(t) Method
Withdrawing from a retirement account early isn’t ideal, but sometimes it’s the only option for early retirees. The 72(t) method allows you to take penalty-free Substantially Equal Periodic Payments (SEPP) from IRAs and other employer-provided retirement accounts like 401(k)s or 403(b)s before reaching the required age of 59 ½. The catch is that the stream of payments must be continued for at least five years (or until you reach age 59 ½). These payments are made based on IRS calculations using the account owner’s life expectancy. If the plan isn’t completed, all previously taken distributions are subject to a 10% early withdrawal penalty.
The Rule of 55
The Rule of 55 is only available for employer-provided retirement plans such as 401(k) or 403(b). In order to be able to withdraw funds penalty-free, you must be at least 55 years old when you leave your job. It allows you to withdraw funds penalty-free only from that employer’s retirement plan, not an IRA if you rolled over the funds. Not all 401(k) plans offer this provision. Therefore, it is necessary to check with the plan administrator to see if it is an option.
In summary, both methods offer you the ability to access funds if you retire early. There are however, some specific differences between 72(t) and the rule of 55. Remember that in either case the funds will be subject to ordinary income tax. Check which type of plan you have to determine which option is best for you. Always consult with your financial advisor before undertaking one of these strategies so you don’t end up with an unintended tax burden.
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Missie Beach, CFP®, CDFA®
Senior Financial Advisor
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