The term "72(t) distributions" comes from the Internal Revenue Code section that provides for both the 10 percent early withdrawal penalty for individual retirement arrangements and the exception for taking a series of substantially equal payments. If you're using the exception, you may still be able to contribute to an IRA, but not to the one you're using for distributions.
Section 72(t) allows you to take money out of an IRA without penalty even though you're not 59 1/2 years old. The amount of the annual distributions is fixed based on the value of the account and your life expectancy. Each year, you must take out the specific amount -- no more and no less. These annual distributions continue every year until you turn 59 1/2 years old or you've been taking the substantially equal payments for at least five years, whichever is longer.
72(t) IRA Contributions Prohibited
Once you start your series of substantially equal periodic payments, you're not allowed to make any additional contributions to the account, including rollover contributions, direct transfers and annual contributions. However, right before you start the series, you're allowed to move money between accounts. For example, if you have just one IRA with $200,000 in it, but you only wanted $50,000 in the account from which you're taking the series of substantially equal payments, you could transfer $150,000 to a separate IRA so it wouldn't be affected.
Other IRA Contributions Permitted
If you have multiple IRAs and you're only taking 72(t) distributions from one of them, you can make your annual IRA contributions by contributing to a different IRA. For example, say you have one IRA at Bank A, another at Bank B and another at Bank C. If you're taking 72(t) distributions from your IRA at Bank A, you can make your annual contributions to your IRAs at Bank B or Bank C without penalty, even though you're not allowed to add any money to the IRA at Bank A.
Open New IRA
If you only have one IRA and you're currently taking a series of substantially equal distributions from it, you can't contribute to it. To get around this limit, simply open a second IRA account. Even though the contribution limit applies to all of your IRAs put together, there's no limit to the number of separate accounts you can have at one time. Once you've opened your second account, you can fund it with annual contributions, but you're still prohibited from adding to or subtracting from the first IRA that you're using for the 72(t) distributions -- aside from the subtraction of equal distributions.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."