72(t)

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Q. 1. I am retired at 52. If I take a life expectancy withdrawal through the Thrift Savings Plan from now until I reach 59½, can I then roll over the balance of my account to a privately held traditional TSP such as Vanguard? Or does taking the life expectancy withdrawal through the TSP commit me to them for life?

2. If I receive life expectancy withdrawals now through the TSP, can I still take a partial withdrawal (amount of my choosing) when I am 59½ without the 10 percent penalty?

3.  If I roll over my entire TSP account now to a privately held traditional TSP such as Vanguard and establish a 72(t) withdrawal arrangement using 120 percent of the applicable federal rate, does the yearly/monthly amount change each year if the AFR changes or will I receive the exact amount every year/month until I reach age 59½ (at which time I can change to equal monthly payments)?

A. If you want to avoid the early withdrawal penalty using the 72(t) rules, you’ll need to continue the calculated distributions for 10 years, or until you reach age 59½, whichever is longer. Moving the money from one custodian to another has no effect on the distribution requirement. During the required distribution period under 72(t), you may not take any more or less than the calculated annual distribution without violating the rules and invoking the penalty. Once you have committed to a fixed distribution scheme under 72(t), it must continue, unchanged for the entire distribution period, which in your case will be 10 years.

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  1. Unfortunately, the expert in this situation is incorrect in their timeline. 72(t) requires the separate and equal periodic payments continue for at least 5 years or 59.5, which ever is longer. Since you are 52, you will be forced to do the 72(t) strategy until you are 59.5 if you start now because it is a longer time frame. Once you reach 59.5, you can stop taking payments if needed and at that point, you are allowed to take any size distribution from your TSP/IRA/Qualified account at that age. Your best bet is to find a tax professional who can help explain the 3 different methods of using a 72(t).

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