| Tax Court Rules on 72(t) Exception Case | | | | exceed the calculated amount of the 72(t) plan. If the |
| When an investor opens a 72(t) plan, they are not | | | | owner of the account is under age 59 1/2, they will be |
| allowed to make any modifications to the plan. | | | | subject to the 10% penalty. They will also incur interest. |
| However, a recent ruling in the U.S. Tax Court may | | | | Exceptions to the 10% Penalty for Early Withdrawal |
| change the current flexibility IRA owners now have. | | | | Now that we have covered how the 72(t) plan can |
| The Court ruled that a particular 72(t) plan was not | | | | save you from the early withdrawal penalty, let's |
| modified when the owner of the IRA withdrew | | | | discuss other ways to become exempt from the |
| additional distributions for education expenses. When | | | | penalty. If you are a first-time home buyer, you will be |
| the owner did this, the IRS sought a 10% early | | | | exempt from the penalty. If you are withdrawing the |
| withdrawal penalty, based on IRA withdrawal rules, but | | | | money for educational expenses, the penalty will not |
| the Court overruled this and ruled in favor of the IRA | | | | be incurred. As long as certain conditions are met, you |
| holder. In the future, this ruling may aid other IRA | | | | will not incur the penalty if you use the money for |
| owners who are in need of funds for specific | | | | medical insurance. If the owner of the account is |
| purposes. As of now, there is no way for us to know | | | | younger than 59 1/2, and they take a distribution based |
| if the IRS will follow the Court's ruling in other cases. | | | | on one of the mentioned expenses, he or she will not |
| 3 Methods: RMD, Annuity Factor, Amortization | | | | be subject to the 10% early withdrawal charge, as long |
| If you are younger than 59 1/2, the 72(t) plan can be a | | | | as you adhere to IRA withdrawal rules. |
| huge benefit if you need to access the funds in your | | | | Pros & Cons |
| IRA without incurring the 10% penalty that is incurred | | | | Now, more than ever, individuals are finding that they |
| for early withdrawing from the account. If the owner | | | | need to tap into the funds in their IRA retirement |
| of the IRA knows that they will need to access the | | | | accounts. For most people, this could mean paying IRA |
| money in their IRA account, they can set up a 72(t) | | | | penalties for early withdrawal. The best way to avoid |
| payment plan which will eliminate the penalty | | | | the penalty is by setting up a 72(t) payment plan. While |
| associated with early withdrawal. The plan can be | | | | these plans sound great, there are some negative |
| used with an IRA, 401(k), TSA, 403(b) and 457 plans. | | | | factors involved. For most people, the payments will be |
| There are three methods used by the IRS to | | | | a fixed amount. If the plan is modified after it is set up, |
| determine payment plans for a 72(t). These include the | | | | the account holder may face serious consequences. |
| RMD, required distribution method, the annuity factor | | | | These payments may have an enormous effect on |
| method and the amortization method. RMS methods | | | | the value of the account. This could lead to having less |
| are calculated in the same manner as they are if the | | | | money to live on later in live. However, the plans do |
| owner were 70 1/2. Basically, the RMD calculation | | | | provide great flexibility. Many people are finding that |
| involves the account balance and the owner's age. | | | | they are in need of financial aid and have no other |
| This method produces different amounts of payout | | | | choice than to tap into their IRA retirement account. As |
| each year. The other two methods used will have | | | | long as the funds are used for medical insurance, |
| equal payments. All payments using these three | | | | buying your first home or paying education expenses, |
| methods are required to continue for a minimum of 5 | | | | you will not incur the 10% penalty. These are the only |
| years, or until the account holder reaches age 59 1/2. | | | | exceptions to the penalty rule. The only other way to |
| As long as the rules are followed, the account owner | | | | access your funds is to set up a 72(t). When you |
| will not be subject to the 10% penalty. | | | | reach the age of 59 1/2, you will be able to get |
| An important thing to remember is that in order for | | | | distributions from the IRA account without the early |
| individuals to qualify for the 10% penalty exception, | | | | withdrawal penalty. The plan is not for everyone. It |
| they cannot change the account balance. They can | | | | may be better to split your current IRA and open a |
| continue to make distributions that are required but | | | | second account. |
| they cannot add funds or take any distributions that will | | | | |