Cashing IRA Early

Ahead of Schedule
The magic age for withdrawing savings from an IRA is 59 1/2. But now, thanks to an exception, you can tap into your account penalty-free and ahead of schedule.

72(t)
The program is called 72(t): "[What] 72t allows people to do, is...access their IRA, taking money out of it on a regular basis, whether it's monthly, quarterly, or annually," according to Todd Battaglia, President of Investment Management at Meg Green & Associates in Florida.

In the past, tapping into your IRA ahead of time meant being charged a hefty fee. But, now,
"You can access that money without having to pay this exuberant 10 percent penalty tax," says Battaglia.

Figuring out the formula
How much you can withdraw penalty-free each year depends on how much is in your account and which of three pay out methods you use.
Life expectancy method: Divides the IRA balance by your life expectancy, which is set by the IRS. Battaglia says this is the simplest method.

To get more information on the life expectancy tables of the IRS, click here.

Alternative payout methods
There are other choices, which are more complicated, but allow for larger payouts because you build an expected rate of return into the calculation. These methods include the:
Amortization method
Annuity method

For more on these methods, click here.

The Rules
Cashing out early does come with restrictions. Once you start taking withdrawals, you must continue for at least five years or until you reach 59 ½, which ever is longer, according to Battalglia. "Someone who does this at 45, ...can be doing it for almost 15 years," he says.

The IRS will only allow you to alter your withdrawal amount only once. After that, "You cannot modify it in any way. You cannot increase it. You cannot decrease it. You cannot stop it," says Battaglia, unless you want to pay a penalty tax all the way back to the beginning. Otherwise, you have to wait until you reach 59 1/2 to make a change.

The IRS recently made changes to the 72(t) rules to set a maximum interest rate for these calculations. In the past, taxpayers were allowed to choose their own rate. Now, you're limited to a rate that is set by the IRS. The rate can change monthly, but your withdrawals are based on the rate in force when you start. To find out the most recent IRS rate, click here.

Also, these new rules allow a one-time, penalty free switch to another pay out method.

Once you reach age 59 1/2 you can do whatever you want with your IRA, either adjust withdrawals or end them completely. You'll have to take withdrawals once you reach the age of 70 1/2.

Bright Idea! 401(k)'s may offer you limited choices on how and where you can invest your money. IRA's provide you with more options. Because of that, financial planners say if you're going to be putting away less than $3,000 a year and are not getting a match, you might consider pulling your money out of the 401(k) and opening up an IRA.

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