72(t) SEPP.
Access your IRA early without penalty (with strict rules).
A 72(t) Substantially Equal Periodic Payments arrangement lets you withdraw from an IRA before 59½ without the 10% penalty. The trade-off: rigid rules. Modify the schedule early and the IRS retroactively applies the 10% penalty to every prior payment.
US-only. Section 72(t) is part of the US Internal Revenue Code. Other countries have different early-access rules.
72(t) is powerful but rigid. Once you start, you must continue the payments for 5 years OR until you reach 59½, whichever is longer. Modify the schedule early and the IRS retroactively imposes the 10% penalty on every payment, plus interest. Use it for IRAs (use Rule of 55 for 401(k)s).
Section 1 · What 72(t) is
IRS Code Section 72(t)(2)(A)(iv) allows penalty-free withdrawals from an IRA before age 59½ if you take "substantially equal periodic payments" (SEPP). This applies to IRAs only. Use the Rule of 55 for 401(k) early access verify×DON'T TRUST, VERIFYClaim: IRC 72(t)(2)(A)(iv) allows penalty-free withdrawals from IRAs in the form of substantially equal periodic payments.Verify at: IRS SEPP guidance ↗Notice 2022-6 (and predecessors) provide the technical methods. Consult a CPA before implementing..
Section 2 · The three calculation methods
The IRS allows three approved methods. Each produces a different annual distribution.
Method 1: Required Minimum Distribution (RMD) method
- Simplest.
- Recalculated annually based on account balance and life-expectancy table.
- Annual payment varies year to year.
- Typically produces the smallest distribution.
Method 2: Amortization method
- Fixed annual distribution.
- Based on account balance, life expectancy, and a "reasonable" interest rate (IRS specifies the maximum allowable rate, currently 5% or 120% of the federal mid-term rate, whichever is greater).
- Typically produces a larger distribution than the RMD method.
Method 3: Annuitization method
- Fixed annual distribution.
- Uses an annuity factor from IRS tables.
- Similar in result to amortization.
For most early retirees, the amortization method produces the most income and is the most commonly used.
Section 3 · The 5-year rule catch
You must continue payments for the LONGER of:
- Five years, OR
- Until you reach age 59½.
- Start at 45: must continue to 59½ (14.5 years).
- Start at 57: must continue to 62 (5 years, longer than the 2.5 years to 59½).
- Start at 55: must continue to 60 (5 years, longer than the 4.5 years to 59½).
If you stop, change the amount, or modify the schedule before the period ends: the IRS retroactively imposes the 10% penalty on every payment made, plus interest. This is the biggest risk: the income must be predictable for the full period.
Section 4 · Strategic uses (IRA segregation)
If you have $800,000 in IRAs and want to access $30,000/year via 72(t), do not put your whole IRA into the SEPP. Split the IRA:
- $300,000 IRA #1: 72(t) distribution producing approximately $30,000/year.
- $500,000 IRA #2: untouched, compounding.
Only IRA #1 is locked into the schedule. IRA #2 remains flexible verify×DON'T TRUST, VERIFYClaim: A 72(t) SEPP can apply to one segregated IRA while leaving other IRAs unrestricted.Verify at: IRS SEPP guidance ↗Standard practice. The 72(t) schedule is calculated on the segregated IRA's balance only. Confirm with a CPA before implementing..
Implementing a 72(t) SEPP is technical. Use a CPA who has done it before. The cost of a mistake is the retroactive 10% penalty on every payment.
- IRS. Substantially Equal Periodic Payments (SEPP) guidance · irs.gov/retirement-plans/substantially-equal-periodic-payments.
- IRS Notice 2022-6. Updated SEPP methods · irs.gov.
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