With this type of distribution, account holders must take at least five substantially equal periodic payments, and these distributions must occur for either five years, or until the owner reaches 59½, whichever is longer. That means someone who starts a 72(t) distribution at age 52 must take withdrawals for seven years, while someone who is 57 would have to make withdrawals until age 62.
Rule 72(t) distributions are viable options for people who need access to their money, but they are complex calculations with rigid distribution rules.
There are three ways the Internal Revenue Service allows individuals to calculate these distributions.
The first is the required minimum distribution method, which takes a person's balance, current interest rates and divides it by his or her life expectancy. Each year it is recalculated based on life expectancy and current balance.
The other two methods are a fixed amortization method, which annually distributes by amortizing the account balance over life expectancy, and a more-complex fixed annuitization method, which uses a person's account balance, age and life expectancy and an annuity factor.
Distributions are bound by the prevailing interest rate, so a lower rate means lower payments.
For example, if the IRA is $1 million and the retiree needs $750,000, rather than drawing down the total amount, she recommends opening a second account to represent the 72(t) distribution, in this case $750,000, and leave the $250,000 in the original IRA. Although the retiree will avoid a penalty, he or she will still need to pay taxes on the distribution amount.
Once rule 72(t) distributions are put in motion, they can't be undone.