By Andy Ives, CFP®, AIF®
IRA Analyst
The 72(t) rules (“series of substantially equal periodic payments”) allow a person to tap retirement dollars before age 59½ without a 10% early distribution penalty. However, to gain early access to the funds, the IRA owner must commit to a strict withdrawal plan. For example, the payments must continue for at least five years or until age 59½, whichever period is longer. Also, the payments must be distributed at least annually, and an approved method must be used to calculate the annual distribution amount.
Typically, when IRA owners are in need of funds, a 72(t) schedule is set up on their traditional IRA. While the 10% early withdrawal penalty can be avoided with a 72(t), taxes will still apply. But what if a person had a Roth IRA? Could a 72(t) be established to access Roth funds early?
Yes, but a 72(t) on a Roth IRA doesn’t always make sense. Why not? Because Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars, and then earnings. A Roth IRA owner always has tax- and penalty-free access up to an amount equal to his total Roth IRA contributions. This is true regardless of age. Since Roth contributions come out first, these dollars are fully accessible – no 72(t) needed.
If any Roth conversions were done, an amount up to the total of all conversions comes out next. AFTER five years, a person has tax- and penalty-free access to those converted dollars, again, regardless of age. Yes, each conversion has its own 5-year clock, but after the clock specific to that conversion has been satisfied, those converted dollars are available for withdrawal penalty-free. (DURING the five-year holding period, distributions of converted funds are subject to the 10% penalty if the individual is under age 59½, unless an exception applies.)
Based on the ordering rules, it seems like a 72(t) on a Roth IRA is merely a way to gain early access to Roth IRA earnings. But if those earnings are touched prior to age 59½, even through a 72(t) program, they would be taxable. All things considered, a 72(t) on a Roth IRA appears to be almost pointless. A person would have to be in a unique situation for a 72(t) on a Roth IRA to make sense.
Such a unique situation recently presented itself. A retired traditional IRA owner, age 55, needed access to his IRA for annual living expenses. The problem was, based on other financial entanglements, he required tax-free income. Yes, a 72(t) on his traditional IRA would allow penalty-free access to the funds, but they would be taxable. This taxable income would negatively impact his other dealings each year going forward.
So, his astute Ed Slott Elite Advisor™ devised a creative plan. The advisor proposed a large Roth conversion in 2026. Yes, this would generate a significant tax hit this year, but the need for tax-free income did not begin until next year. The next step was to initiate a 72(t) on the new Roth IRA, with the first payment scheduled for 2027. Based on the aforementioned Roth IRA distribution ordering rules (and since this person had no Roth IRA contributions), distributions of the converted dollars could begin. The 10% penalty would be avoided, and the annual income over the life of the 72(t) would be tax-free. After five years the 72(t) could be stopped, and the then-60-year-old would have full access to all his Roth IRA funds. Brilliant.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/72t-on-a-roth-ira/