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What Are 72t Distributions and How Can They Help You Retire Before 59 1/2 - YouTube
Channel: Oak Harvest Financial Group
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one of the more little known ways to
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access your money inside the retirement
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account prior to 59 and a half is called
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a 72 t distribution so there are three
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different methods to do this the irs
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provides you the formula you just have
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to calculate it to see what you'll
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receive that's what we're going to cover
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today
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[Music]
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hi i'm troy sharp ceo of oak harvest
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financial group certified financial
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planner professional and host to the
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retirement income show now i know a lot
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of you would never retire prior to 59
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and a half you just don't know what you
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do with yourself but by going through
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the comments and doing this channel for
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some time and working with clients for
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many many many years i also know many of
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you do want to retire prior to 59 and a
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half if you've heard me ever say it once
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you've heard me say it a bunch you
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should be saving money outside of that
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tax infested retirement account but
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still most of you have not listened to
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me for 10 years or 15 years this may be
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the first time you're ever seeing oak
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harvest and myself talk about retirement
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income planning and tax planning but
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here's the deal if you have all of your
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money inside that retirement account and
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you're just fed up and you want to quit
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or you want to to retire or you've been
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laid off and you're kind of stuck
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because you're not aware of how to take
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money out of that retirement account and
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avoid that 10 penalty the 72 t
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distributions may just be for you i want
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to encourage you to talk to your cpa or
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tax advisor talk to your financial
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planner talk to your financial
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institution to help you run these
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calculations the purpose of this video
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is to help you be aware that this choice
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exists just a quick second to remind you
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to subscribe to the channel and hit that
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bell icon so you can be notified when
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we're gonna upload more powerful
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retirement content to help you keep more
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connected to your money and also comment
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down below we love to see the comments
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so there are essentially three ways to
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calculate what your maximum 72t
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distribution will be the required
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minimum distribution method the fixed
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amortization method and then the fixed
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annuitization method so again talk to
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your financial institution we're going
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to look at a calculator today talk to
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your cpa but ultimately people want to
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take whatever gives them the most amount
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of income and there are different
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formulas for all three of those ways so
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the rules you have to take a series of
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substantially equal periodic payments
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for whichever is longer five years or
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until 59 and a half so if you're 45
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years old then you have to take these
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equal periodic payments until you're 59
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and a half if you're 57 you have to take
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it for five years it's whichever is
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longer you cannot deviate from the
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schedule if you deviate from a schedule
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retroactively that ten percent early
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withdrawal penalty will be applied to
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all of those distributions that you make
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you also will still have to pay income
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tax on these distributions 72 t is not a
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way to avoid income tax on your ira
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distributions prior to 59 and a half
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just to follow properly you can avoid
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the 10 early withdrawal penalty
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the next thing we need to understand is
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the
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federal midterm rate so this changes on
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a monthly basis as you are aware
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interest rates are pretty low right now
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so this is a negative
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feature to the plan
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if we see here in january of 2021 they
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were 0.52
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today i'm recording this video in
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december of 2021 they're 1.26 so the law
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says
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you have to take a conservative approach
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to calculating these methods
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the most or the highest interest rates
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you can use is 120
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of the federal midterm rate so 120 of
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this is about 1.51
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okay next month probably will be a
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little bit higher we can see the trend
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here as we're experiencing a lot of
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experiencing a lot of inflation in the
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country typically interest rates are
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going to follow
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it's not a guarantee
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but we see the trends pretty clear over
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the past few months here
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once we have determined what the
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federal midterm rate is and 120 percent
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of that
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this is a simple bank rate calculator
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bankrate.com
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on the surface i trust the numbers that
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it's calculating but of course we
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haven't vetted this i just googled it
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and found it this is why i say talk to
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your cpa
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just i want to give you an idea of how
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much money we can take out so the first
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example we're going to look at here is
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you have 1 million dollars in your ira
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1.51
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is 120 to the federal midterm rate
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you're 50 years old don't worry too much
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about the beneficiary age right now the
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maximum 72 t distribution is 37 652 so
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you would have to take that from age 50
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to 59 and a half and that is the most
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you can take out per year
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if you're 57
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okay the maximum 72 t distribution is
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44187
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now
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you have to take that for five years
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these are a series of substantially
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equal periodic payments for whichever is
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longer 59 and a half or five years so 57
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five years is obviously longer this is a
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simple bar chart showing the three
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different methods the required minimum
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distribution method fixed amortization
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method and then the fixed annuitization
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method
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not a ton of difference the rmd method
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is the least in all three of the
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scenarios and the other two are pretty
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similar
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let's say you have five hundred thousand
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in your retirement account
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and you're 57 years old the most you can
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take out is twenty two thousand zero
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nine three per year
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let's say you have
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1.5 million
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inside your 401k
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the most you can take out is
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66280 at fifty seven
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if you're fifty five
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sixty three two one seven so you get the
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point this is bankrate.com there are
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other calculators on the internet i
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believe we may even have one on our
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website
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but do a calculation talk to your cpa
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and understand that you have to take
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them for five years or 59 and a half
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whichever is longer
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and you cannot deviate from the schedule
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you still will owe income taxes on these
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distributions but you will avoid if done
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properly the 10 penalty if you know
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someone who wants to retire prior to 59
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and a half friend family member share
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this video with them also as always hit
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that subscribe button the little bell
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icon so we can continue to deliver you
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powerful retirement content to help you
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be more informed and more connected to
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your money
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you
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