What Is a 72(t) Distribution?
Considering a 72(t)? Get a Custom Plan
We’ll model Substantially Equal Periodic Payments (SEPP) and compare alternatives like annuities and bridge income strategies.
What is a 72(t) distribution? It’s a way to take money from an IRA before age 59½ without the 10% early-withdrawal penalty by committing to a series of Substantially Equal Periodic Payments (SEPP). Once started, you must follow strict rules for a set period—otherwise the IRS can retroactively apply penalties. This guide explains how 72(t) works, common methods, timelines, risks, and when an alternative may be better.
72(t) Basics
- What it is: A structured plan of equal payments from an IRA (and some other IRAs like SEP/SIMPLE) that avoids the 10% penalty before 59½.
- What it isn’t: Not increased flexibility—once you start, changes can “bust” the plan and trigger penalties plus interest back to day one.
- Eligible accounts: IRAs are typical. Workplace plans (like a 401(k)) usually require a qualifying separation or rollover first.
- Taxes: Distributions are still taxable income; the 72(t) only waives the penalty, not income tax.
SEPP Calculation Methods
There are three IRS-accepted ways to compute your annual payment. You must use an IRS-approved life expectancy table and an allowable interest rate per current IRS guidance.
| Method | How It Works | Payment Pattern | Notes |
|---|---|---|---|
| RMD (Required Minimum Distribution) | Divide prior year-end balance by life expectancy factor each year. | Varies each year | Most flexible; payments adjust as balance and age change. |
| Amortization | Amortize account balance over life expectancy using an allowable interest rate. | Fixed amount | Higher initial payment than RMD; level through the plan term. |
| Annuitization | Convert balance to a theoretical annuity payment using IRS mortality assumptions. | Fixed amount | Similar to amortization; uses annuity factors. |
Note: IRS guidance limits the interest rates you can assume for amortization/annuitization. We’ll model using current rules.
One-time switch: You may generally change once from a fixed method to the RMD method (not the other way).
How Long Payments Must Last
- Duration rule: Must continue for the longer of five full years or until you reach age 59½.
- Busting the plan: Any modification—too big/too small a payment, extra withdrawal, or missed payment—can cause the IRS to assess the 10% penalty on all prior distributions in the series, plus interest.
- Segmentation tip: Many people carve out a separate IRA just for the SEPP amount and keep other IRAs untouched for flexibility.
Pros & Cons
| Advantages | Tradeoffs |
|---|---|
|
|
Simple Examples
Example 1: Bridge to 59½
Alex, age 56, needs $1,600/month until 60. A segmented IRA is set up for SEPP using the amortization method to target that cash flow for at least five full years. Alex keeps other IRAs intact for emergencies.
Example 2: Variable income using RMD method
Priya, age 52, wants a smaller, more flexible payment that adjusts annually. She chooses the RMD method so payments vary with her balance and age.
Who a 72(t) May Fit
- Early retirees who need income before 59½
- Workers between jobs who want a structured bridge
- People with large IRA balances who can segment an account for SEPP
When it may not fit: If you need flexibility or anticipate changing income needs, a rigid 72(t) can be risky. Consider alternatives below.
Alternatives to Consider
- Delayed filing strategies: Use taxable cash or a short-term annuity to bridge into 59½ or retirement savings timelines.
- Fixed or fixed indexed annuities: Principal protection and predictable growth; can coordinate with income riders when you’re ready.
- 72(q) for nonqualified annuities: Similar concept for nonqualified annuity contracts.
- Social Security timing: Coordinate with our Social Security planning to improve lifetime benefits.
FAQs
Can I stop or change my 72(t) later?
Not without consequences. Modifying payments before the required period generally “busts” the plan, adding a 10% penalty plus interest on prior SEPP withdrawals.
Which method gives the highest payment?
Amortization or annuitization usually produces higher initial payments than the RMD method. We’ll model each under current IRS limits.
Can I do a 72(t) from a 401(k)?
It’s typically done from an IRA. If you’ve separated from the employer, a rollover IRA is common before starting SEPP.
Are payments monthly or annual?
SEPPs are calculated as an annual amount, then paid on a schedule (monthly, quarterly, etc.) that totals the required annual figure.
What interest rate can I use?
The IRS limits the assumed interest rate for amortization/annuitization methods. We’ll use the current allowable rate per IRS guidance.
Helpful Resources
Compare 72(t) vs. Alternatives
We’ll design a plan that fits your age, tax situation, and cash-flow needs—no pressure.
Request a Personalized 72t Quote
Prefer to talk? Call 800-533-5969
