If you use the so-called 72(t) rules to take penalty-free withdrawals from your IRA before age 59-1/2, you can choose among three approved methods:
* Life expectancy (also known as the required minimum distribution, or RMD, method). If your life expectancy is 46.5 years, you’d withdraw 1/46.5 of your IRA balance. The next year, you’d withdraw 1/45.5 of the new balance, based on your new life expectancy. And so on. This method is chosen by people who want to minimize penalty-free withdrawals and leave as much as possible in the IRA.
* Amortization and annuitization methods. These methods assume your IRA will grow at a certain rate. Therefore, the IRA is projected to become larger and you can take out greater amounts each year.
These two methods are used by people who want to maximize penalty-free withdrawals for living expenses. Generally, the amount you withdraw in Year One is the amount you’ll withdraw in each successive year. In some circumstances, by using the amortization method you might be able to take out three times as much, penalty-free, as you can with the life expectancy method.