72t Distributions: Retirement Account Access Strategy and Considerations

72t distributions allow early access to retirement funds with tax penalties waived, but involve complex calculations and limited flexibility.

### Understanding 72t Distributions for Early Retirement
* 💸  72t distributions allow early retirees to access retirement funds penalty-free before age 59 1/2 by taking **substantially equal periodic payments**.
* 🔢  Three methods are available for calculating payments: **RMD, amortization, and annuitization**, each with its own **rules and considerations**.
* ⏳  Once initiated, 72t distributions must continue for **5 years or until age 59 1/2, whichever is longer**, with **limited flexibility to adjust**.
* 📊  The strategy is more academic than commonly used in practice, as it requires **precise planning and commitment over a long period**.
* 💰  Pros include **straightforward accumulation through pre-tax contributions** and **potential tax advantages during distribution**.
* ❌  Cons include **complexity, limited flexibility, and potential risks** if calculations are incorrect or circumstances change.
* 🔒  Access to Roth assets' **tax-free growth** is restricted until **age 59 1/2**, even with **72t distributions** in place.
* 🔥  For many in the FIRE movement, who save large portions of income and often have a mix of tax-advantaged and after-tax assets, **72t distributions may be more of an academic exercise than a practical retirement income strategy**.

[Music] Let's move on to strategy number two, and this one is a little more nuanced, a little more complicated, and this one again is all over the personal finance sphere when you talk about FIRE and the FIRE movement, folks. And they're called 72t distributions, named after the specific part of the tax code where this is written. These are a little unique. These are something most people don't encounter. I don't mind sharing when I was studying for my original, you know, CFP materials, and then even in practice, you hear about this, you know, substantially equal periodic payments. This is somewhat sexy in the fact that if you're a math-minded person, you're like, Wait a minute, I could actually retire at 35 and still get access to all my retirement assets or whatever portion of the retirement assets I need if I just did this cool little math thing and I annuitized it. There's something about the financial mutant brain that I thought this was a cool endeavor, but I think and we'll go through and maybe

you can even walk through. How does this work Bo? But I will tell you more of this is academic than what we've seen in real life. That's exactly right. What a 72d distribution allows you to do is every year, it allows you to pull out a substantially equal periodic payment from your retirement account. So you can receive payments before 59 A5 from those qualified retirement plans without penalties. Again, you are still subject to ordinary income tax but you can waive the penalty so long as certain things are met, certain conditions. So a lot of times when people decide how they're going to use 72t, you really have to begin with the end in mind. You have to sort of back door into, okay, how much of an income do I need and over what period of time do I need that income. So when it comes time for me to retire, how do I segregate my accounts in order to take advantage of 72t. So here's how it works and this is sort of like the loose

30,000 foot over. First, you want to choose your account. It can be a 401k account, it can be an IRA account. Oftentimes, individuals will split up their IRAs or split up their 401ks and specifically choose one account in which they're going to implement their 72t distributions so they can have some sort of guaranteed income stream. So they choose the type of account that they're going to use, and then they have to choose the payment method. Now, this is where it gets a little more complicated and a little more nuanced. There's really three different payment methods that you can select from. There's the RMD payment method, which is recalculated every year based on the portfolio value and your life expectancy, so this number will not be the exact same every year. It will fluctuate a little bit based on mortality factors, but it's substantially equal. That's why they don't say exactly equal, they say substantially. That's option number one. Option number two is the amortization method, where essentially it kind of works like a

mortgage. You pick the interest rate and the timeline, and it will amortize over a certain specific amount of time to pay you a guaranteed payment. Or the third way you can do is kind of a combination of the two. It's the annuitization method where, again, based on your mortality, in a stated interest rate, and a stated timeline, you can annuitize a specific payment over a specified period of time to receive a certain payment. And this is this column right here. Choose the payment. I think this is the part when I was the, you know, the person learning all these concepts of how you get access to these large retirement accounts without paying all these penalties that you so worried about and you're trying to avoid. I love that this was one of those things where you don't have to do it off the entire account. You can chisel this off, and it's a math calculation. This is why I think US Financial mutants are drawn to these type of strategies is because you can just figure out back into what will I

need to be the my bridge account to get me to that 59 a half period. Where I get access to everything. You know under the tax code and can I back into the math of how I do it. But there is something you need to be aware of cuz a lot of these. You have to figure out how long do I have to set this in for. Is this a set it because it is one of those things if you choose a 72 um distribution rule. Once you choose you get a lot of flexibility. We just laid out these three ways. But once the day you execute this you're stuck with this for hear the hear me out on this for five full years or until you turn 59 and a half. And it's not the shorter of those two numbers it's the longer of those two numbers. So you need to really really pay attention cuz once you set it you are locked in on this. So it is something that you you kind of measure once again measure twice cut once to make sure you get this part.

right the longer your retirement window is, or the longer the further you are away from 59 and a half, the more complicated this becomes. Because imagine if at age 34 entering into age 35, you're planning on taking advantage of 72t distributions to bridge you from 35 all the way out till 59 and a half. Your calculations better have been spot on. You better have a really good bead on what your living expenses are, or if you don't, you better have another source of fund, source of resources that can help you pay for it. So 72t can be attractive, and it can be unique, and it can give you a way to access your retirement dollars, but there's a lot that goes into. I do want to give the caveat because we said this earlier, but I want to make sure people didn't overlook it. If you have Roth assets and you're really excited because we love the tax-free growth, realize you don't truly get that access to the tax-free growth portion of this until you're 59 and a half. So make sure you understand.

there's a little caveat in the rule that you don't get to really do grab that until you reach that age. So be careful with that. All right, so let's talk about the pros and cons. The benefit one of the pro of a 72t distribution is the accumulation process is pretty straightforward. You just save pre-tax. You follow the food. You max out your 401ks. You max out your IRAs. You don't have to get super super complicated in how you are accumulating. That part of the process is pretty straightforward. And then it is tax advantaged again if you're in a higher tax bracket while you're accumulating and a lower tax bracket while you're de accumulating. You got a bigger tax benefit when you were earning the dollars and you pay lower taxes when you go to pull those dollars out. But there are Cons with 72 TS. Yeah, I mean it it it's got there's some complexity here. So there's risk. I mean especially think about somebody. You gave the example of 34. But I I'll even get a

little closer um and say if you did this like you're between 45 and 50 you know you're locking yourself onto this for the next 10 years. That could be somewhat scary. And by the way, there's some complexity and if you mess this up, the penalties and the costs could be pretty severe. So that's definitely something that probably keeps people to being a little nervous about. Hey, what am I not thinking about or what unintended consequence while I create here, yeah. And there you already mentioned this, there's such there, there's very little flexibility in the beginning. You can have some flexibility in terms of how big the account is that you establish the payments on and what method you used to calculate the payments. But once it starts, once the timeline starts, you're locked in. You can't change that a touch. So these are really, really interesting and it's really, really a fun academic exercise. But I think it's worth noting and we'd be doing a disservice if we didn't acknowledge this for most of.

our folks who implement early retirement and enter into FIRE or enter into FINRA while 72t is something we might have a conversation around, and it's something we might investigate. I feel like it's much more academic than it is practicable. A lot of our folks who actually enter into retirement to pay for the living expenses. This isn't one that we see being the most often used method to provide for retirement living expenses. I find working with a number of FIRE movement individuals is that these typically, if you're going to be see anybody in the FIRE movement, is saving large sums of their income. I'm talking 40, 50, even 60% of your gross income. So for you to be able to still have a life and to save 40 to 60% of your income, you probably make a good living big. And it's not uncommon also for a lot of these FIRE people to have restricted stock units because maybe they work for a tech startup or some company out there that incentivizes their retention through

stock options through RSUs so it's not uncommon that you just naturally are going to have tax-favored accounts. But you're also going to have after-tax assets. And so this, you said it exactly right. A lot of times, these are more academic, you know, analysis because it's not ideal and the complexity and you, you know, locked in for a decade or longer. It can be somewhat scary.

Are 72(t) Distributions the Key to Retiring Early?

Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life.

Subscribe today to stay up to date with our latest episodes, livestreams, and highlight videos: https://www.youtube.com/c/MoneyGuyShow?sub_confirmation=1

Are you ready to go beyond common sense when it comes to your money? Check out all the free resources The Money Guy Show provides: https://moneyguy.com/resources/



The Money Guy Show

The 72t Distributions: A Unique Strategy for Early Retirement

72t distributions, also known as substantially equal periodic payments, allow for penalty-free withdrawals from retirement accounts before the age of 59 ½, providing a way for early retirement.

These distributions require careful planning to determine the needed income and how to segregate accounts to take full advantage of the strategy.

The concept is more academic than commonly applied, but it offers a mathematically intriguing opportunity for those looking to retire early.

Choosing the Right Payment Method for 72t Distributions

When setting up 72t distributions, individuals need to choose the type of retirement account and the payment method.

The payment methods include the RMD method based on life expectancy, the amortization method similar to a mortgage, and the annuitization method which is a combination of the first two.

These methods allow for access to retirement funds without incurring penalties, making them attractive to many.

Understanding the 72t Distribution Rule for Retirement

The 72t distribution rule provides flexibility but requires careful consideration, as once chosen, you're locked in for five years or until age 59 and a half.

It is crucial to accurately calculate and plan for living expenses to avoid being stuck with the chosen distribution method.

Additionally, the rule's interaction with Roth assets means that access to tax-free growth is not available until age 59 and a half.

The 72t distribution offers a straightforward accumulation process through pre-tax savings in 401ks and IRAs, providing a tax advantage for those in higher brackets.

However, there are risks and complexities involved, especially for those in their 40s and 50s, with little flexibility once the distribution starts.

This lack of flexibility and the potential for severe penalties can make people nervous about committing to a 72t distribution.

The Effectiveness of Early Retirement Strategies

Implementing the 72t method for early retirement is more academic than practical for covering living expenses.

The FIRE movement often involves saving a large portion of income, indicating a high salary, and may include stock incentives like RSUs.

These strategies are complex and not commonly used for funding retirement expenses, often requiring a long-term commitment.