Eddie Patel, President
Action Investment Services, Inc.

Escape the IRA Trap: Use 72(t)

Written by Eddie Patel

What is the IRA Trap?

Most IRAs have a 10% tax penalty for early withdrawal before the age of 59 1/2 , which poses a significant problem for people in need of penalty free access to their retirement funds. You might be retiring early or you might just need to supplement your income for other reasons.

This trap also applies to annuity distributions, before age 59 1/2.

The Solution

A little known provision in the IRC, Code 72(t) is the answer. It was most recently revised in January 2003. 72(t) is really the formalized name for something the IRS calls, "substantially equal distributions." Essentially your objective will be to avoid the 10% penalty on early withdrawal of your IRA by committing to one of 3 distribution methods, offered upon application, by the IRS:

• The Minimum Distribution Method
• The Amortization Method
• The Annuitization Method

The general rule is, you must accept the payment amount prescribed by one of the methods above for 5 years or until age 59 1/2, whichever finishes LAST.

Each payment method is computed based in part on all of the following elements:

1. Your Age
2. The Age of your Beneficiary
3. The Amount of Money you have
4. The Percent Rate Used for the Calculation
5. Your Life Expectancy

At this point I must provide you with the disclaimer that we are not a tax advisor and the information you see here should involve work with a qualified professional in this field.

There are some items you must be careful with when using this code, but all things considered, if executed properly, you may be able to avoid the IRA trap.

------------------------------------------------------------------------------------------------------------------------------------------

If you would like us to provide you with a FREE estimate on how much a 72(t) could net you in additional annual income, contact us.