72(t) Distributions: The Ultimate Guide to Early Retirement

72t Distributions: The Ultimate Guide to Early Retirement

What’s the most common piece of retirement advice you’ve ever heard?  I bet it has something to do with tax advantaged retirement savings.  Most people are inundated with voices telling them to start saving early and take advantage of tax deferrals.  It’s solid advice.  Saving tax deferred money through IRAs, 401(k) plans, and other retirement vehicles is a wonderful way to grow your wealth over time.

The downside?  Those pesky withdrawal penalties.  The IRS will typically ding you 10% if you withdraw from these accounts before turning 59 1/2.  This can pose a problem if you’re considering an early retirement.  Fortunately there are a few loopholes.  eight of them, in fact:

  1. Roll withdrawals into another IRA or qualified account within 60 days
  2. Use withdrawals to pay qualified higher education expenses
  3. Take withdrawals due to disability
  4. Take withdrawals due to death
  5. Use withdrawals for a qualified first-time home purchase up to a lifetime max of $10,000
  6. Use withdrawals to pay medical expenses in excess of 7.5% of adjusted gross income
  7. As an unemployed person, take withdrawals for the payment of health insurance premiums
  8. Take substantially equal periodic payments pursuant to rule 72t

For those of you interested in an early retirement, the final loophole is likely the most interesting to you.

According to rule 72t, you may take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments”.

This post explores how.


Rule 72t

Rule 72t allows you take substantially equal periodic payments (SEPPs) from your accounts free of penalty.  No disability, death, or unemployment required.  All you need to do is agree to take consistent withdrawals each year for the rest of your life, based on IRS calculations.

This opens a lot of doors, since you can theoretically start distributions from your retirement accounts whenever you want.  It can also be limiting.  Once you begin taking SEPPs, you’re required to continue for 5 years or until you turn 59 1/2 – whichever is later.

Deviate from the prescribed withdrawals and you’ll incur the dreaded 10% penalty PLUS back interest.  This applies to mistakes when calculating your withdrawals too, which is why many advisors discourage taking SEPPs altogether.

Before you pull anything from a retirement account, you’ll first need to calculate the exact amount of your SEPP.  There are three methods the IRS allows you to choose:


Fixed Amortization Method

With this method, you’ll amortize your annual payments in level amounts over a specified number of years.  Just like a mortgage, the idea is that you’ll work your account balance down to $0 by the end of the payment period.  The time frame you’ll use is your life expectancy according to IRS tables.  There are three mortality tables you can choose from:

  1. Single Life Expectancy
  2. Uniform Life Expectancy
  3. Joint Life and Last Survivor Expectancy

All three tables can be found on the IRS website.  You’ll need to search for the most current tables, since they do change periodically.

Also like a mortgage, you’ll need to plug in an interest to calculate the payment.  You have some discretion here.  You can choose any rate you wish, as long as it doesn’t exceed 120% of the federal mid-term rate from either of the two months preceding the month you start distributions.

Here’s an example:

Let’s say that Mike is 50 years old and wants to retire early.  His life expectancy according to the current IRS tables for a single life expectancy is 34.2 years.  The current federal mid-term rate is 2% (which he uses), and Mike’s IRA account balance was $250,000 on December 31 of the previous year.

This is what his amortization table would look like over the first few years.  Starting at $250,000 and earning 2% per year, $10,163 is the amount he’d need to withdraw each year to zero out the account in 34.2 years:

72t Distributions: The Ultimate Guide to Early Retirement


Annuity Table Method

Also known as the fixed annuitization method, the annuity table method calculates annual distributions using an annuity factor – similar to what an insurance company would use to determine annuity or pension payouts.  This method is similar to the amortization method in that you’ll take equal annual distributions from then on.  It’s also a little more complicated.

The IRS explains the annuity factor you’ll use as “the present value of an annuity of $1 per year for the life expectancy of the account holder”.  Just as in the amortization method, life expectancy used is published in IRS tables, and you select an interest rate based on the federal mid-term rate.

The easiest way to calculate the annuity factor is by using Microsoft Excel, Google Sheets, or a financial calculator.  Using our example above, Mike’s life expectancy is 34.2 years.  So, using one of these tools, we want to ascertain the present value of an annuity of $1 per year over a life expectancy of 34.2 years.

This is the formula we’d use in Excel: =PV(Rate, Number of Periods, Payment, Future Value, Type).  In Mike’s example, =PV(2%, 34.2, $1, $0, 0) gives us an annuity factor of -24.6. 

Mike’s annual distribution would then be $250,000 / 24.599 = $10,162.85.  He’d then continue withdrawing $10,162.85 each year.


Requirement Minimum Distribution Method

The RMD method is the easiest to calculate, but results in the lowest annual distribution.  You’ll also need to recalculate your withdrawal amount each year.

Rather than use an amortization schedule or annuity factor, the RMD method simply divides your account balance every year by your life expectancy.  You will need to look up your life expectancy in the IRS tables each year, but the calculation is straight forward.  It’s also a great method to use if you expect your account value to fluctuate widely, since you recalculate your withdrawal annually.

In our example, Mike would take his account balance of $250,000 on December 31 of the previous year and divide by 34.2.  His first distribution would be $250,000 / 34.2 = $7,309.94.

Let’s say at the end of the first year, on December 31st, his account balance has grown to $260,000 (including the distribution).  His life expectancy would then be 33.2 (assuming the IRS tables haven’t changed), meaning Mike should withdraw $260,000 / 33.2 = $7,831.33.

Keep in mind here that Mike’s RMD factor is based on his age, and decreases each year.  Since this is the denominator in the equation, that means that his distribution will get larger every year as long as his account continues to grow.


Comparing the Options

Typically the amortization method and annuity payout method will yield similar distribution amounts.  They’re also both fixed year to year.  The RMD method requires a recalculation each year, which can be beneficial in some circumstances.

In Mike’s situation he’d have the following options:

72t Distributions: The Ultimate Guide to Early Retirement

It’s OK if these calculations seem confusing.  There are many resources out there to help you run the numbers.  Bankrate.com has a solid 72t withdrawal calculator, and your tax advisor should also be ready and able to help.


Changing Options

Whereas you have some discretion over which method you choose to begin with, you have very little flexibility after you start taking payments.  The amortization and annuitization methods require to calculate your payment in year 1, and then continue using that payment from then on.

The amortization and annuitization methods also allow you to change to the required minimum distribution method later on.  From that point forward, you won’t be allowed to change methods again.  If you select the required minimum distribution method to begin with, you’re not allowed to change calculation methods at all.


Taking Distributions

Once you calculate the amount you’re required to withdraw in year 1, the rest isn’t difficult.  You’ll simply liquidate investments in your account if you need to, and request the withdrawal from your broker or custodian.

Since the transfer will be coming from a qualified account, you’ll owe tax on the distribution.  As such, your custodian will be required to send you a 1099-R form at the end of the year.

1099-R forms have a section (box 7) that tells the IRS know whether your distribution qualifies for an exception to the 10% early withdrawal penalty.  A code of ‘1’ means you’re taking a distribution before 59 1/2, and your custodian doesn’t know about any exceptions.  This doesn’t mean that they are refuting your claim, only that they don’t know you’re taking SEPPs pursuant to 72t.

With a code of 2, your custodian tells the IRS that you’re taking an early distribution that qualifies for an exception.  Again, your custodian isn’t rendering an opinion on the validity of your distribution.  They’re only communicating your purpose.


How to Retire Early With Rule 72t

If your 1099-R is marked 2, you won’t need to make additional filings.  If it’s marked 1, you’ll need to file Form  5329 with the IRS.  Since the IRS won’t know that your distribution qualifies as a 72t SEPP, you’ll need to tell them yourself.

When taking your withdrawals each year, it’ll help to speak with your custodian. Many firms have forms you can fill out to communicate your intent to take SEPPs.  Others have staff on hand to help you make the calculations and ensure you don’t make mistakes with the withdrawal amounts.  Regardless of how yours is set up, you can save yourself some time by speaking with a rep before taking any money out.


[Click here to download Above the Canopy’s Retirement Readiness Checklist]


When You Should Take 72t Distributions

Many tax and financial experts strongly discourage people from taking 72t distributions.  The logic is that account balances in tax deferred vehicles should be left alone to grow.  Experts think that by withdrawing funds early, you’ll increase your likelihood of running out of money in later years.  Others others advise their clients to steer clear since it’s pretty easy to make a mistake that could be penalized later.

While I agree with the sentiment (generally we want to keep funds in tax advantaged accounts), early withdrawals are a necessity for many people, and part of a well structured retirement plan for others.  Here are some situations where taking 72t distributions might be a good idea:

  • You have a well thought out retirement plan
  • You’re good at budgeting
  • Your assets are spread across several different accounts & locations
  • You’ve thought about a long term tax strategy
  • You’re comfortable with the commitment
  • You know what you’re doing


When You Shouldn’t Take 72t Distributions

Again, the decision to take a 72(t) distribution should not be taken lightly.  Here are some red flags:

  • You’re not totally clear what your retirement path looks like
  • You have trouble staying consistent with a financial plan
  • You have other funds to draw income from first
  • You want to retire early but aren’t sure where your retirement income will come from


72(q) Distributions

While 72(t) applies to early withdrawals from a retirement account, 72(q) applies to early withdrawals from a non-qualified annuity.

Annuities are considered qualified when they’re held in a qualified retirement account.  This might be a 401(k), IRA, 403(b), TSA, or defined benefit pension plan.  Annuities held in these types of accounts are generally paid for with pre-tax dollars.

In contrast, annuities are non-qualified any time they’re not used to fund a tax advantaged retirement plan or IRA.  Contributions to non-qualified annuities are paid for with after-tax dollars, and premiums are not deductible from gross income when reporting income tax.

If you hold a non-qualified annuity, you’re also subject to the 10% penalty if you take withdrawals before 59 1/2.  If this is you, you can set up 72(q) distributions as opposed to 72(t) distributions.  The parameters are substantially the same.


Some Suggestions When Taking 72t Distributions:

  1. Keep copies of the account statements you use as the basis for your calculations.  You’ll want proof in order to justify your withdrawals if you’re audited by the IRS down the road.  Keep everything for at least seven years, as you should for all your financial & tax documents.
  2. Communicate with your custodian when taking SEPPs, and ask about their process.  There may be a chance to file paperwork beforehand and influence how they mark your 1099.
  3. Don’t round when figuring out your withdrawals.  Calculate everything down the penny.
  4. Most people will want to consult a financial planner when considering 72(t) distributions, and a tax consultant when calculating the annual withdrawals.  72(t) distributions can be very convenient, but cost you a lot of flexibility in the long run.  And given the repercussions of making a mistake, consulting a team of experts is almost certainly worthwhile.



What happens if I don’t take a prescribed withdrawal?

If you begin taking substantially equal periodic payments under rule 72t, you must continue to do so for at least 5 years or until you turn 59 1/2 – whichever is later.  If for any reason you don’t take the prescribed withdrawal (you stop, make a mistake, etc.) there will be IRS penalties.

The internal revenue code imposes the standard 10% early withdrawal penalty plus interest, without exception.  In addition, if the mistake is found in an IRS audit there could be penalties for substantial underpayment and/or filing a fraudulent return.  This can tack on as much as 50% in additional penalties.

If you realize you’ve made a mistake, it’s always best to be forthcoming with the IRS.  And since the repercussions can be severe, most people elect to have a tax advisor assist them when calculating annual withdrawals.


Can I change calculation methods?

After you start taking 72t distributions, you may only alter your calculation method in limited situations.  If you use the annuitization of amortization methods you may change to the RMD method at a later date exactly once.  At that point you must continue using the RMD method.  If you start by using the RMD method, IRS rules prohibit you from changing course later.


Do I have to notify my custodian or broker that I’m taking 72t distributions?

No, but it’s a good idea to.  You may be able to avoid filing additional forms with the IRS.  See the next question.


Do I have to file anything with the IRS?

Possibly.  Any time you take a distribution from an IRA you’ll receive a 1099-R from your trustee or custodian.

Your custodian will mark box 7 with either a ‘1’ or a ‘2’.  Marking a 1 indicates that your withdraw is an “Early distribution with no known exception.”  Marking a 2 indicates “Early distribution, exception applies under age 59 1/2.”

If your custodian marks a 2, you won’t need to file anything since the IRS knows you qualify for an exception to the early distribution penalty.  If they mark a 1, you’ll need to file form 5329 in order to notify them.

Before taking your withdrawals, it would be wise to call your custodian and inquire about their process for taking early distributions.  They might have forms or resources to make the process easier.


I have several accounts, how does that work?

You don’t have to apply the rule to all your accounts – just the one you’re taking distributions from.  If you have several IRA and/or 401k accounts, you can take 72t distributions from one account without touching the others.

This can be extremely convenient.  You could theoretically split an existing account deliberately by rolling funds into a new IRA, and back in to the exact annual withdrawal you’re seeking.  Just remember that once you begin SEPP’s you may not contribute or withdraw funds from the account (other than taking the annual withdrawals, of course).


Can a portion of my IRA assets be excluded?

No.  You must incorporate the entire balance in each of the accounts you take distributions from.  Segregation of assets within one account is not allowed.  See the previous question for a workaround.


What if my account balance falls to $0?

If your account is completely depleted, you can discontinue withdrawals without incurring the 10% penalty.


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  1. Pingback: IRA Contributions After 70.5...Can You? Should You? -

    • My understanding is that once you break the distribution schedule you’ll be subject to the penalty, which is due in that calendar year. At that point you can begin a new 72t distribution, but I believe you’d need to wait until the following year.

      Sounds like you’re clear on how the penalty works. But just as a reminder, all the distributions you made pursuant to rule 72t become subject to the penalty – even those made in prior years. On top of that, the IRS assesses interest for prior years where you failed to pay the penalty.

  2. If I have an IRA account with 2 mutual funds in it, can I just include one of them in the calculation or should they both be included? Also, assuming both funds needed to be accounted for in determining the amount needed to be withdrawn, I assume I can take the distribution out of either fund, or both funds if I choose, so long as the amounts add up to to the correct withdrawal amount.

    • Yes, that’s correct. All that matters in the calculation is your total account balance. As long as you meet the annual distribution requirements it doesn’t matter which fund the proceeds come from.

  3. So what is you’ve just recently opened and IRA meaning you can go back to a previous yr balance. If you’ve opened an new account for transfer from either another IRA or a 401k account. Can your calculation be based on the current balance whenever during the yr?

  4. If you rollover a Roth 401k to a Roth IRA, is it accessible before 59? My accounts will be about half Roth and half Traditional when I am ready to retire and I don’t think a distribution of just the Traditional account will be enough for the 72t distribution. I am trying to decide if I need to start putting more in Traditional and less in Roth.


  5. The 401k provider for our office says I can only take a 72t distribution if I leave the business and that I cannot take such a distribution if I am still employed here until I am 59 1/2. Is this correct?

    • If that’s what the 401k provider says, then yes they are correct. 72t allows you take “substantially equal periodic payments,” avoiding the 10% early withdrawal penalty. Your 401k plan doesn’t have to allow withdrawals (or “in service distributions) while you’re still employed though. ERISA & the IRS give 401k sponsors the discretion of whether or not to allow them. If your’s doesn’t I’m afraid there’s not much you can do.

      If you really need the funds you might consider a 401k loan. But again, your plan may or may not allow them.

  6. If i am starting a 72t distribution in August 2018, should my current balance be reflected in the calculation or only the balance from the end of 2017? What if the amount has increased or decreased significantly?

  7. I am a newly minted Federal Retire (under FERS), via an “early out” (I’m just 52.5! :).
    My tax man says that since I am under 65 my FERS annuity is going to be hit by the IRS with a 10% surcharge/penalty.
    All I can find online (including this article) is the 10% penalty for account withdrawals before 59½: Is this the same thing and he is mistaken on the age? If so, does that mean the FERS annuity is considered an IRA??
    Let me clarify/stress that this is the monthly OPM pension annuity, NOT the TSP 401K!
    If it is, since the annuity is the same amount every month, can’t I just claim it as a “72t SEPP”?
    If it is not, where is this addressed in the IRS reg.s?

    • I think the confusion must be with the words “annuity” versus “pension.” I too am a FERS retiree via Early-Out and receive my pension the 3rd of each month. It is not penalized 10% (I too am in my early 50s). Your pension is your pension. Period. The SEPP is for retirement plans, not pensions. At least that’s my understanding. Enjoy retirement!

  8. Stopping distribution s at 59 1/2 means the month you turn 59 plus 6 months correct? Even as this crosses into another fiscal year. Please confirm.

  9. I have a similar question to cheleeta. I am expecting a pension lump sum transfer into my IRA in Jan-2019. If I begin 72t distributions in Feb-2019 do I use my balance of 12/31/2018 or can I use 1/31/2019?

  10. I am setting up my 72t plan. One of the assets in my IRA account is a variable annuity product where the guaranteed contract value (which grows at 6%/year) exceeds the cash value of the original invested contributions. Do I have flexibility in calculation, to use the higher guaranteed contract value or do I have to use the cash value of the original invested contributions?

  11. Hi.. I would like to know if when calculating balances to determine the 72t distribution, you can use an annuity’s contract value or if you have to use the cash value. I have an annuity as one of the assets in my IRA and the contract value is significantly higher than the cash value. So I’d like to use the contract value when determining the total balance.

  12. Hi Grant,
    I am confused about something. In multiple paragraphs you say you must take SEPPS up until age 59 1/2 or age 60, whichever is later. Then it says use must “continue for the remainder of your life.”
    If I start taking my SEPPS at age 55 then once I am 60 can I not do whatever I want with the remaining balance and pay my normal taxes? Thanks Grant

  13. Great article. Question if someone starts a 72t from an IRA on June 1st using an amortization method and in December of that year they want to change it to an RMD can they do so right away or is there some type of time restraints? One more question. If I have an IRA with a 72t being withdrawn and I transfer it to another custodian and some of the investments are proprietary so they do not transfer right away now I have 2 IRA accounts is this an issue?

  14. I am receiving a SEPPs each year. It was set up to pay out same amount every Nov. Is there a penality if I was to move the payout MONTH to earlier in the year (No other changes either in amount paid out during the year or method )

  15. I need to withdrawal 30000 from my 72t for medical issues for my daughter. I no there’s a 10%penalty on it but is there a penalty for what was paid out each month last year also. I started it last February

  16. I plan to retire in June of next year and take distributions starting in July. Do i need to take the the entire required distribution for the year or just half since i will only be taking distributions for half a year?

  17. Here is a question which has befuddled Fidelity. From experience I know that Fidelity does not always have the correct answer. I established a 72(t) in the year 2016. I have a few more years to go. My withdrawals have been identical since the month and year I elected the 72(t).

    Let’s assume my SEP IRA balance back in 2016 was 1 million, and let’s assume today it’s also 1 million, maybe a bit more. I have only ever had one SEP IRA.

    Can I do the following: have Fidelity carve off 900K and create a new SEP. When all is said and done, I would have two SEP accounts at Fidelity, two account numbers, one with 100K, one with 900K. No withdrawals of any kind, no additions of any kind, no disruption to the monthly distribution. No change to the aggregate account balance, other than market fluctuation and/or investment earnings.

    As I have not made a change to my distribution, and I have not made any withdrawals above and beyond what is prescribed per my original election, have I “modified” my plan and tripped the switch which leads to penalties and interest.

  18. Can I use a lower Reasonable distribution interest rate of my choosing other than the federal mid term rate of a given month for the initial calculation? For example: April 2019 rate is 3.15%. Can I use 2.0% or 1.25% instead? Assuming an average market return of 6% moving forward, I would not want to withdraw more than the familiar 4% safe withdraw rate from my IRA per year so given my current age, 1.30% on a $500,00 SEPP IRA just about equals out to 4% per year. Thanks.

  19. You should reword the first part of this where you say you have to take distributions for the rest of your life. Not so! You do go on to explain the rule but this sentence is misleading.

    • I agree this point is confusing – so what happens at age 59.5? Am I required to keep taking distributions for the rest of my life, or can I choose to stop taking distributions once I hit that age?

  20. Can I setup a 72t distribution, take it, and then take more out(which would be subject to 10% plus taxes) and not interfere with 72t distributions?

    • No. You can only take out what was calculated for the distribution, no more, no less. Any additional withdrawals you need to make should be taken from an IRA account that was NOT included in the calculation of you 72t distribution. If you take out more from an IRA account that is part of the 72t, then you will be penalized 10% across the board, not just the amount that was in excess.

  21. I have had 72t for 2 years. I will have to stop it because of financial problems. Do I pay 10% penalty on what I’ve took out or entire balance

  22. I want to turn on 72t distributions using the Amortization method. Today it is Oct. 30. Can I calculate my withdrawal based on my October statement value? Say the annual distribution comes to $10,000. Can I take a full annual distribution ($10,000) before the end of the year and then another full annual distribution (i.e., another $10,000) as early as January next year? Thanks.

  23. I am now 61 and on my last year of my 72T. I am being told that now since I’m over 59 1/2 that I can also take an additional distribution this year after I take my normal 72T amount. Is that true or will I be penalized for taking out more than the 72T?

  24. As others have commented. Some parts of the article contradict other parts. Specifically ‘rest of your life’ vs ‘5 years and 59.5yrs’

    Can you start a 72t age 55. End it at age 60. And then withdraw whatever you like including zero after that ?

  25. I have been taking a 72t/SEPP for many years (more than 5 years) without issue.I am now 56. I have recently (this year) become disabled and am now in receipt of SSDI. Ive read different articles and opinions on this but my question is hopefully a simple one.


    I think I can but before I do I wanted the benefit of an opinion short of paying for an IRS opinion and bringing further attention on myself.

  26. I currently have my IRA at Charles Schwab and they really won’t provide any services to facilitate 72(t) distributions. Does anyone have any suggestions for a different brokerage firm/custodian?

  27. I retired from a company and started collecting SEPP. I am under
    59 1/2. Can I go back to work for this company if they don’t contribute to my retirement? Thanks

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