This calculator was developed to help participants of a tax-deferred savings program (such as 401k or IRA) calculate 72t withdrawals for early retirement income. Using tax code 72t, account holders can take a series of carefully calculated payments prior to the 'standard' age of retirement without triggering the 10% penalty.

But, with three approved distrbutions methods, how will you choose the right one? This calculator will illustrate the payments from each IRS approved method, so you can compare your options equally.

Keep in mind, the prospect of retiring early can be complicated as there are many factors to take into account. As such, it can be beneficial to consult with a tax or finance professional regarding your situation.

72t is a section of IRS code that allows you to take penalty-free payments from a tax deferred retirement account, such as 401(k), IRA, or 403(b) by making equal annual withdrawals over a specific number of years. These series of substantially equal periodic payments (SEPP) must follow certain calculation procedures and abide by each of the IRC requirements correctly to save time and money.

Before you can begin taking money from your retirement account, first you need to determine the amount you are permitted to withdraw each year. To do this, you must use one of the three approved distribution methods constructed by the IRS to determine your payment allowance. Then, once you begin your withdrawals, you must adhere the strict rules set out by the code.

All three-distribution methods require your age and savings balance along with the use of an IRS mortality table, while only two methods require you to set an interest rate. Even though you have full discretion over which method to set your payments with, there is very little flexibility after you begin your withdrawals.

When considering your 72t distribution method, you will be required to use one of three IRS mortality tables, each designed for different marital circumstances. The single life expectancy table is for singles of all ages, while the uniform lifetime table is for spouses that are within ten years of age to each other and the joint life table is for spouses separated by more than ten years.

Once you have identified the table applicable to your situation, you may select a distribution method.

The simplest method is the required minimum distribution, but as the name suggests, it results in the lowest annual distribution. This technique divides the balance of your account (from the end of the previous year) by a life expectancy factor from the IRS tables.

The next distribution is the fixed amortization method, in which you can amortize your annual payments in equal amounts for many years. You can select any interest rate for the amortization as long as it doesn’t exceed 120% of the federal mid-term rate, which is updated monthly. This method develops the largest and most reasonable fixed amount that can be withdrawn annually.

The final IRS approved approach is the fixed annuity method, which calculates annual distributions using an annuity factor provided by the IRS to determine equal payments. Account holders may also select an interest rate to get a fixed annual payout that falls near the midpoint of the amounts presented by the other two methods.

The IRS is very strict about maintaining consistency and does not offer much leeway for mistakes. Once you establish your annual payment using one of the calculation methods you must continue taking payments for the latter of 5 years or until you reach the age 59.5. Only after this point can use your retirement funds without limitation.

There is one exception to the 72t rule that will allow you to make a one-time change from the fixed methods (amortization or annuity) to the required minimum distribution method only. Simply put, the IRS will only allow you to make a change to take a lesser annual payment from your retirement account.

If you have more than one pre-tax retirement account, you can transfer funds between the accounts to increase or decrease your annual distributions, but this has to be done before the inception of the periodic payments. You'll also have to discharge your investments before you initiate your distributions.

The only activity that is allowed in your retirement account after the commencing of the 72t is the withdrawal of the required distributions.

It's easy to make simple mistakes such as withdrawing slightly more or slightly less, forgetting an annual withdrawal, or accidentally taking two distributions in one year. If any deviations occur, apart from the one-time allowable change, all of your distributions will be subject to a 10% penalty and interest back charged on all your payments.

Theoretically, that is up to you. Once you have calculated the amount you can withdraw your first year, you'll have to decide if that level of income will meet your needs. There's also the consideration of whether you'll have enough in your savings to last for the rest of your retirement too. It can be helpful to consult with a financial advisor regarding this topic, as there are many small but important things to consider. If everything checks out, taking 72 distributions is pretty straight forward.

You'll have to discharge your investments before taking payments, and then request your 72t withdrawal from your custodian. You must then continue receiving payments under the guidelines set out by the IRS to avoid any penalties.

You will owe income taxes on your earnings and thus, should receive the correct form from your custodian at the end of the year (form 1099-R). In some cases, you may need to file an additional form (form 5329) to explain to the IRS that your distribution qualifies as a 72t SEPP and should not be penalized.

The calculator has two parts: a questionnaire and a result window. In order for the system to generate an accurate report it requires some information regarding your retirement savings plan. Let's review the questionnaire together.

1. Step 1: On the first line of the calculator you may add the balance of your retirement account. For accurate calculations it is best to use your balance from the end of the previous year.
2. Step 2: Next you should select an interest rate that does not exceed 120% of the mid-term rate on the second line of the calculator, by referencing the federal rate sheets. This variable will be used for the calculation of your distributions for the fixed amortization and annuity methods.
3. Step 3: On the third line of the calculator you may indicate your age, using the arrow keys to make the selection easier. Then on the fourth line, please include the age of your beneficiary/spouse. If you do not have a beneficiary and are using the single lifetime table, you may leave the variable the way it is as it will not be used for your calculation.
4. Step 4: Finally, please indicate which life expectancy table should be used for your calculations. The single lifetime table is for singles of all ages, the uniform lifetime table is for spouses within ten years of each other, and the joint life expectancy is designed for spouses over ten years apart.
5. Step 5: View your results.