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Rule 72(t): An Exit Strategy For Your Floundering IRA

August 1st, 2010 · No Comments · Investing

Individual Retirement Arrangements, also referred to as Individual Retirement Accounts, are all the rage when it comes to retirement planning. Imagine that, retirement planning trends. OK, OK, wake up and wipe the drool off of your face.

It might not be the most interesting topic to learn about, but government qualified retirement plans are some of the most common tools used to save money. However, some people have begun to realize that planning for retirement is really not possible (at least not with any kind of accuracy). So, they are trying to figure out how to get out of the government plans that they're in so that they can do more productive things with their savings.

If you ever get to that point in your personal financial plan where you want to ditch the government plan, you may want to learn about IRS rule 72(t). Normally, IRS rules are evil, and they are complex, and they aren't really written to be understood by the layperson. Well, this one is a little different…except that it's still somewhat complex.

Rule 72(t) was designed so that you could make early withdrawals from your retirement plan without incurring a penalty. Clearly, this is useful for people who want to retire early, or who want to spend the money on starting a business, or for some other purpose.

To back out of your IRA, you need to make equal and substantial withdrawals from your IRA according to a withdrawal schedule posted on the IRS website. Just in case you don't want to wade through all the fine print and confusing instructions on the IRS' website, MassMutual has created a nifty calculator that you can use to determine how to make your 72(t) withdrawals.

Then all you need to do is contact your broker and tell him that you want to pull the plug on your IRA using 72(t) withdrawal rules, and they'll hook you up with a few forms that you'll need to fill out, and viola! You're out of your government retirement plan. You'll have to pay income tax on the distributions, but you'd have to do that anyway when you start making withdrawals. However, there's no penalty on these withdrawals if you are younger than age 59 1/2.

It's a great way to start an early retirement, or ditch the outdated idea of retirement altogether and start a business that can support you into your old age, or invest in some strong dividend companies that can provide you with a more stable income than any of the mutual funds in your IRA (plus, you won't be forced to sell them after age 70 1/2 like you will in your traditional IRA).

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