Rule 72(t) Early Withdrawals from Retirement Accounts

The IRS rule 72(t) allows for penalty free, early withdrawals from retirement accounts.  If you're under age 59 1/2, the rules for 72(t) distributions require you to receive Substantially Equal Periodic Payments (SEPP) from your IRA each year. These payments must last for 5 years or until you are age 59 1/2, whichever is longer

 If you change the amount, or stop taking withdrawals, the IRS will slap a 10% penalty on every withdrawal you've taken since you set up the plan, plus interest.

These payments must be calculated using one of the IRS approved methods which include:

  • Required Minimum Distribution Method:  this is the simplest method for calculating your SEPP, but is does produce the lowest payment.  It simply takes your current balance and divides by your life-expectancy.  This payment will change each year.
  • Fixed Amortization Method:  The annual withdrawal is calculated using the amount of money in your plan, your life-expectancy and the amount of interest you expect to earn.  The annual payment remains the same.  Many retirees prefer this method because it provides larger payouts.  This is simple but remember these larger payouts can reduce your nest egg.
  • Annuity Method: This method uses an annuity factor to calculate your SEPP and is the most complex method.

Always consult a tax advisor regarding these three calculations and make sure your IRA custodian is familiar with 72t calculations and payments.  Any mistakes with these payments could cost  you penalties and interest.

Also, 401k or other employer plans do not allow 72(t) distributions.

 A 72(t) distribution has to be taken from an IRA.

Helpful Tips on 72(t)

  • Start Late.  Remember, you must take the payments for five years or until you turn 59 1/2, whichever is later.  If you start at age 55, you'll be locked in for five years.  But if you start at age 50, you'll be required to take payments for 10 years.
  • Split your IRA into several accounts.  Your withdrawals are based on the total value of your IRA.  If the withdrawals are larger than you need divide the IRA into two separate accounts and set up payment plan for just one IRA.  It's okay to have several different IRA accounts.
  • Think about distribution rates.  When you use the amortization or annuity method, you must factor in an annual interest rate.  A high rate will result in larger payments but it can jeopardize your IRA.  If your IRA account isn't growing or the market plummets your IRA  could be depleted by high distribution rate.

A 72(t) calculator is available on our Calculators, Links and Tools Page.

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