Naked Truth Investing: The complex world of 72(t) distributions.

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This is part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: Can a 72(t) distribution be taken while still employed?

Answer: Welcome to the complex world of section 72(t) distributions!

As a general rule, there is a 10% penalty if you withdraw funds from your qualified retirement account before age 59½. Under some circumstances, you can avoid this penalty if you qualify for "72(t)" distributions (named after the governing section of the Internal Revenue Code).

Whether you qualify for a 72(t) distribution depends on your age, whether you are disabled, whether the payments are part of a series of "substantially equal periodic payments" made over the period of your life expectancy, whether you have left employment and are age 55 or older, whether you intend to use the distributions for medical care expenses and other factors.

Because of the number and complexity of the issues involved, and the strict requirements imposed by the IRS on 72(t) distributions, you should seek the advice of an accountant or financial advisor with experience in setting up a plan that will qualify under section 72(t).

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.

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