72(t) Distribution Impact
72(t) Distribution Impact Inputs |
Account Balance by Age for Selected 72(t) Distribution Method |
In January of 2022, Notice 2022-6 specified a change to what is considered an acceptable interest rate when calculating distributions. Previously the rule set the maximum rate at 120% of the Federal Mid-Term rate. The new rule makes 5% the maximum unless the 120% of the Federal Mid-Term exceeds that amount. The Federal Mid-Term rate to use can be from either of the two months immediately preceding the month in which the distribution begins.
For January 2025, 120% of the Federal Mid-Term rate 5.10%. Click here for more information about Federal Interest rates.
It is important to note that the associated law that created 72(t)/(q) distributions did not define what was to be considered a reasonable interest rate. As such, the guidance from the IRS generally flows from the concept that they will not allow people to circumvent the requirement of substantially equal periodic payments (SEPP) throughout your lifetime by using an unreasonably high interest rate.
This is the interest rate you expect to receive on your retirement account. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31st 2023, had an annual compounded rate of return of 15.2%, including reinvestment of dividends. From January 1, 1970 to December 31st 2023, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.9% (source: www.spglobal.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a financial institution may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.
This is your account balance as of the close of business on December 31st of the prior year. The IRS has decided that the balance on this date should be used for 72(t)/(q) distributions with one important exception: this amount is increased by any contributions made for the preceding year after December 31st.
This is your current age. Use the age you will turn on your birthday for the year you are receiving the distribution.
This is your beneficiary's age. Use the age your beneficiary will turn on their birthday for the year you are receiving the distribution. This entry is ignored if you do not use your Joint Life Expectancy to calculate your SEPP.
There are three different life expectancy tables that the IRS allows you to use when calculating your SEPP with the 'Fixed Amortization' or the 'Required Minimum Distribution' methods.
For SEPP calculations on or after January 1st, 2022 this calculator has been updated, as required by the Internal Revenue Service (IRS), to use the updated Life Expectancy tables finalized in November 2020. It is important to note that once you have chosen a distribution method and life expectancy table, you cannot change either throughout the course of your distributions. (Except for a one-time change from the Annuitized or Amortized methods to the Life Expectancy method, see SEPP definition for more details).
| Uniform Lifetime | This is a non-sex based table developed by the IRS to simplify minimum distribution requirements. The uniform lifetime table estimates joint survivorship, but does not use your beneficiary's age to determine the resulting life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. |
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| Single Life Expectancy | This is a non-sex based life expectancy table. This table does not use your beneficiary's age to calculate your life expectancy. This table can be used by all account owners regardless of marital status or selected beneficiary. Choosing single life expectancy will produce the highest distribution of the three available life expectancy tables. |
| Joint Life Expectancy | This is also a non-sex based life expectancy table for determining joint survivorship using your oldest named beneficiary. |
The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59-1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:
In addition, on July 3, 2002, the IRS ruled that you could change your distribution type one-time without penalty from the Annuitized or Amortized methods to the Required Minimum Distribution method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception please see Revenue Ruling 2002-62 on www.treasury.gov.
If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. It is important to remember that while 72(t)/(q) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.
This is the percentage of your account you wish to receive in annual distributions after the required 72(t)/(q)/(q) distributions have been made. This percentage will be used to calculate the annual distribution after five years have passed or you have reached age 59-1/2, whichever comes later.
At age 72 Required Minimum Distributions (RMD) are required to begin for most tax deferred accounts. The calculation assumes that your account will be subject to RMDs at age 72. If, for any given year, your Post 72(t)/(q) distribution is lower than your RMD the RMD will be used as the distribution amount. The RMD is calculated using the Uniform Lifetime Table which may produce a life expectancy higher or lower than the 72(t)/(q) life expectancy depending on the table chosen for the 72(t)/(q) distributions. This calculation does not use the option for RMDs calculated with the Joint Life Expectancy table available when the only beneficiary is a spouse and he or she is more than 10 years younger than the account owner. If you have questions, please consult with your own tax advisor regarding your specific situation.