72(t) early distribution analysis

The 72(t) Early Distribution Illustration helps you explore your options for taking IRA distributions before you reach 59½ without incurring the IRS 10% early distribution penalty. Internal Revenue Code (IRC) Section 72(t)(2)(A)(iv) defines these distributions as "Substantially Equal Periodic Payments". The IRS has approved three ways to calculate your distribution amount: annuitization, amortization and required minimum distribution.

You may choose any of the three methods on which to base your distribution amount. To avoid the 10% penalty once you begin distributions, you must continue to take the required distribution using the same method, at least annually, for the longer of five years, or until age 59½. Once distributions begin, if the series of payments is modified in any way, the 10% early distribution penalty will be imposed retroactively beginning with the first year of distribution. Exception: The five-year rule is waived upon death or disability of the IRA owner. It is also waived for IRA owners who make a one-time change from the amortization or annuitization methods to the required minimum distribution method.

For purposes of this analysis, the distribution amounts are shown as annual figures. However, you may choose to make withdrawals monthly, quarterly or semi-annually.

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Minimum distributions must be taken from traditional IRAs by April 1 following the year that a person turns 72. A minimum distribution must be taken from the IRA in each subsequent year. Failure to take the required minimum distribution will result in a 50 percent penalty on the amount that was not distributed. Mandatory distributions that represent deductible contributions and all earnings are taxed as ordinary income. Mandatory distributions based on nondeductible contributions are tax-free.

The amortization method. Here, the IRA account balance is treated like the mortgage amount due on a home. The IRA is "amortized" using a fixed interest rate prescribed by IRS regulations over a term equal to the account owner’s life expectancy. (A different interest [higher] could be used, but then it would require the account owner to prove the rate selected was reasonable, should the IRS inquire.) Rather than paying a lending institution, as would be done with a mortgage, the IRA pays the account owner. The annual payout is fixed at the time distributions commence and does not vary from year to year. Just as with mortgages, the higher the interest rate is, the larger the payout will be, and the shorter the payout period is, the larger the payout will be. Putting the two together, you can surmise that older individuals will receive more annual income given an equivalent amount of IRA dollars and even moreso in a high-interest-rate environment.

The annuity method. Is similar to the amortization method in that it uses the same interest rate and life expectancy, but then introduces a mortality table prescribed by regulation to pay out the IRA account as if it were an annuity. The annual payout is fixed at the time distributions commence and does not vary from year to year.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We can not and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. Projected return rates are hypothetical and have been selected by you and/or your financial adviser. They are not representative or suggestive of any Lord Abbett returns. Legislative and/or regulatory actions can affect your actual outcome either positively or negatively.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

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