Planning for your retirement is an essential activity in preparing for your future, especially if you want to retire early. If you have been active in planning for your retirement, you have probably realized that there is a sea of options, terms, accounts, and even strategies to securing a financially sound future.

Despite your individual level of financial education, you have probably (at the very least) had the following points drilled into your thought process:

  • You need to save for retirement
  • There are tax-deferred as well as after-tax account options;
  • You can’t touch the money you have saved for retirement until turning 59 ½ years of age.
The IRS imposes an early withdrawal penalty on most distributions prior to age 59 and 1/2. IRS Rule 72(t) can avoid that penalty.

The IRS imposes an early withdrawal penalty on most distributions prior to age 59 and 1/2. IRS Rule 72(t) can avoid that penalty.

You probably know that if you make early withdrawals from certain retirement accounts, those withdrawals could be subject to income taxes plus an additional 10% early withdrawal penalty from your friends at the IRS!

But is this really true? Do you have to wait until a certain age to have access to your money? What if you want to access your money before you are 59 ½?

You may be surprised to learn that you do not have to wait until you are 59 ½ to have access to your money. In fact, the IRS allows retirement account owners early access to their funds if certain requirements and criteria are met.

For example, the IRS allows for early, penalty-free withdrawals for things like making educational payments or for a first time purchase of a house. Even unforeseen events related to disability and paying for health insurance premiums are reasons the IRS allows for early access to money stashed in retirement funds. Of course, each exception comes with its own set of rules.    

What if you simply want to retire early or you have another reason for needing to access your money and the above-mentioned exceptions to the 10% early withdrawal penalty do not apply to you? Well, the IRS has an exception for you too and it is called rule 72(t).

What is Rule 72(t)

Rule 72(t) is an exception written into the IRS tax code that allows holders of certain qualifying retirement plans and accounts to access their money prior to turning age 59 ½ without being hit with ordinary income taxes AND an additional 10% penalty.

Major criteria to rule 72(t) eligibility include:

  • Owning funds in eligible retirement plans
    • Eligible plans include 401(k), 403(b), 457, TSP, IRAs, and some other qualified plans such as pensions as defined by the IRS.
  • Calculating your Substantially Equal Periodic Payments (SEPPs)
  • And taking those SEPPs for a minimum of 5 years, or until age 59 ½, whichever is longer

If you are considering early retirement, it is extremely important that you understand all of the rules, eligibility criteria, and SEPP calculation methods that exist. Failure to understand the regulations surrounding rule 72(t), or failure to consult a knowledgeable financial advisor prior to making SEPPs may lead you to major disappointment like being subject to additional tax penalties or having inflexible income amounts over the subsequent years.

What Are SEPPs (Substantially Equal Periodic Payments)?

One major component to rule 72(t) to be aware of are the substantially equal periodic payments (SEPPs). SEPPs are the calculated amount of income that you will withdraw from your account balance on a yearly basis. Ordinary income tax is applied to each yearly SEPP that you make, and remember that under rule 72(t), you must withdraw one SEPP per year for a minimum of 5 years, or until turning 59 ½, whichever is longer.

The exact SEPP amount will depend on which calculation method you use. 

There Are 3 Methods For Calculating Your SEPPs.

  • The minimum distribution method
  • The fixed amortization method
  • The fixed annuitization method

Once an owner of a retirement account begins to take SEPPs, the IRS requires that the account holder continues to take the particular calculated SEPPs for a minimum of 5 years, or until age 59 ½, whichever is longer. After this period, you can change the amount of money withdrawn or stop receiving the payments entirely.

SEPPs can also be very limiting, and with only 1 exception, cannot be changed within the first 5 years, or until age 59 ½, after the first SEPP distribution is made, otherwise, additional taxes may be applied.

To be clear, a SEPP distribution occurs after the particular SEPP method is chosen and calculated, and the account holder makes a withdrawal from the balance of the retirement account. It is recommended that you keep detailed records on which SEPP calculation method is used and how the calculated distribution amount was determined in case of an IRS audit. 

Due to the way in which the amortization and the annuitization methods are calculated, they will produce a fixed yearly SEPP amount whereas the minimum distribution method will produce an amount that varies from year to year. This may be confusing since SEPP stands for substantially equal periodic payments, yet the minimum distribution method produces varying and unequal SEPP values. As long as one of the three methods for calculating a SEPP is used, the IRS will consider the actual SEPP amount withdrawn to be valid.

What happens if I want to change the method of SEPP calculation?

This is a very important question to consider before beginning to receive SEPPs. If you change the method of SEPP calculation (which will then change the yearly SEPP amount that you withdraw from your account), the IRS will no longer waive the penalty for making early withdrawals to your retirement account.

In other words, you will pay income taxes on the amount withdrawn, plus the additional 10% tax, plus interest for the deferral period. Changing the calculation method is considered a modification to the SEPP and doing so will result in a penalty.

There is one exception to this rule. The IRS will allow you to change, without penalty, the method of SEPP calculation from either the amortization or the annuitization methods to the minimum distribution method in any year after the first SEPP is received. This change can only be made once, and once it is made, the minimum distribution method must be used for all subsequent years.

How Is Life Expectancy Determined For Rule 72(t)?

The IRS uses life expectancy values in order to calculate SEPPs. There are three different tables available:

  • The uniform lifetime table
  • The single life expectancy table
  • The joint and last survivor table.

You can view these IRS tables by visiting

Any table can be used but you must pick one. You can use the tables to make SEPP calculations using the different methods. However, for final determination, use the help of a financial planning expert in choosing a table. Make sure that you consider all of the tables and how their particular values will change the SEPPs.

If you use the minimum distribution method to calculate your SEPPs, you must use the same life expectancy table for each yearly SEPP. For the amortization and annuitization methods, remember that you will only make one initial calculation and that value will be used for all subsequent SEPPs.

The Rule 72(t) Minimum Distribution Method

This is the simplest calculation to make. This method uses your retirement account balance (as of December 31st of the previous year) and divides it by the specific life expectancy number obtained from one of the three life expectancy tables. The calculated value is the minimum yearly withdrawal amount that you must make to your account balance. Note that this is the minimum amount required, but you can decide to take out more. However, this will change your yearly income total and thus your tax picture as well.

Also, with each passing year, your total life expectancy will change so you will need to insert the new number each year when making the SEPP calculation and subsequent withdrawal. Thus, this method is not considered to produce a fixed SEPP value.

The Fixed Amortization Method

In this method, the SEPPs are subject to amortization, or spread out over your determined life expectancy based on the IRS tables. Using this method, the SEPP is calculated once based on the account balance, an interest rate applied to the account balance and the life expectancy obtained from the chosen table.

SEPPs received in all subsequent years will be the same as the first SEPP received, thus this method produces a fixed yearly payment. Make sure you carefully determine the taxes owed and that you are comfortable with this distribution amount before committing to this method.

The interest rate used in the calculation is determined by looking up the current mid-term Applicable Federal Rate (AFR) which the IRS produces monthly. Currently, mid-term AFRs are around 2-3% and, for the purposes of SEPP calculation, represent an estimated interest earned on your account balance. The actual percentage you choose to use in the SEPP calculation must not exceed 120% of the mid-term AFR value.

The Rule 72(t) Fixed Annuity Method

The yearly SEPP is calculated by using your account balance, an annuity factor, an interest rate, and a life expectancy (actually, in this case, a mortality value is used) value.

The annuity factor is determined by using the current value of an annuity of $1, or it can be derived using the IRS mortality table. Again, the interest rate is applied to the account balance from December 31st of the previous year and cannot be more than 120% of the current AFR mid-term rate.

Similar to the fixed amortization method, the SEPP value is calculated for the first annual withdrawal, and that same value is applied to all subsequent yearly SEPPs, thus the annuity method also produces a fixed yearly SEPP amount. 

A Comparison Of The 3 Rule 72(t) Methods

Minimum Distribution

Fixed Amortization

Fixed Annuity

  • Simple calculation
  • Yearly calculation
  • Varying SEPP
  • Often provides the lowest annual payment
  • Low risk of depleting funds
  • Can withdraw more than minimum
  • Complicated calculation
  • Calculated only once
  • Higher yearly SEPP
  • Fixed yearly SEPP
  • May not keep up with inflation*
  • Complicated calculation
  • Calculated only once
  • Higher yearly SEPP
  • Fixed yearly SEPP
  • May not keep up with inflation*

*Current US inflation is hovering around 1- 2%. Historically, inflation rates have had a range of 1-4% even though the late 1970s and early 1980s saw rates above 10% at times. The interest percentage that an early retiree uses in the SEPP calculations under the amortization and annuitization methods, which cannot be more than 120% of the mid-term AFR values used when the calculation is made, which are currently around 2-3%, may not be as high as inflation for a particular year. Thus the purchasing power of each dollar received from annual SEPPs is lower if the applied AFR is less than the annual inflation rate.

Which calculation Method Should I Use?

In order to determine which calculation method to use, look beyond the simplicity or difficulty of the calculation alone. Calculate, or receive help calculating, what the exact yearly SEPP values would be and how much these values may differ. Ask yourself if each value will provide you with sufficient income for your retirement plans. Also, consider if you are comfortable with having fixed SEPPs if you choose the amortization or annuity methods versus a variable SEPP with the minimum distribution.

I Want To See An Example Of My Possible SEPPs

There are many rule 72(t) SEPP calculators online that take into consideration various factors and will give you a comparison of all three methods using the different life expectancy tables while also taking into consideration different interest rate ranges to be applied to the SEPP calculation as well as forecasted interest rates applied to your actual account balance. The calculators allow you to adjust numbers such as your retirement account balance, age, and possible interest rates so that you can begin to see what your SEPPs will be. Using these calculators and the help of an expert professional will be your best starting point for getting a clear picture of actual dollar amounts that you could receive as SEPPs.

Consult a tax expert and consider how your tax burden will change with a given SEPP amount. In general, the higher your income, the more taxes you have to pay. The ordinary tax rate is applied to SEPPs.

FAQs With Rule 72(t)

Can I Access My Funds In An Employee Sponsored Retirement Account Using Rule 72(t) And Continue To Work With My Employer?

No. If you have an employer-sponsored retirement plan and you begin to make early withdrawals (prior to age 59 ½ ) from your account balance while still employed, you will be penalized with additional tax to the withdrawal amount. In order to avoid the additional tax and qualify early withdrawals as substantially equal periodic payments, you must separate yourself from that employer prior to receiving your first SEPP. This may not be the case if you’re over age 50 (for public safety workers) OR age 55 for non-public safety workers. Please consult your accountant.

Can I Continue To Contribute To My Retirement Account Even If I Am Using Rule 72(t) To Make The Yearly SEPP Withdrawals?

No. The IRS does not allow the account holder to continue to make contributions nor make a non-taxable transfer into another retirement account nor rollover funds into the same account from which the owner is making withdrawals under rule 72(t). Any additional contributions will void the rule 72(t) exception, and any withdrawals made on the account will be subject to ordinary income tax plus the additional 10% tax penalty.

Gains or losses within the account due to the performance of the invested funds are not considered to be added or lost funds and thus the account owner will not be subject to additional taxes.

Can I take SEPPs from an IRA while still working and contributing to an employee plan?

Yes, you can apply rule 72(t) to an IRA at any time, just be aware of all the rules. You cannot also continue to contribute to that same IRA. Also, consider how this will change your income and thus your tax burden if you are also working and contributing to an employer retirement plan. Contact a financial planner prior to taking any decisions. 

What Happens If 100% Of The Funds Are Depleted From My Retirement Account?

If your funds are depleted due to receiving qualified SEPPs from the same account, and you are no longer able to receive SEPPs, you will not be penalized even if the depletion of funds occurs prior to receiving the SEPPs over the mandated time period of a minimum of 5 years.

When Should You Use Rule 72(t) For Early 401(k) Retirement Plan Distributions?

  • You want to retire early
  • You have enough funds to cover expenses for the duration of retirement
  • You have a well designed long-term financial plan
  • You have reviewed your plan with an expert financial planner and an expert tax accountant
  • You are comfortable with committing to making withdrawals for the required time (at least 5 years or until age 59 ½, whichever is longer)
  • Life events lead to a situation in which you need access to your funds but you do not qualify for other early withdrawal exceptions

If you decide to use rule 72(t) to begin early retirement, make sure you thoroughly document all steps, keep records such as account statements used for SEPP calculations, and read all the fine print provided by the IRS as it relates to this rule.

Don’t try to navigate all of these rules and calculations alone! Seek the advice and help of experts, like myself. Please reach out to me if you have any questions or concerns about your financial planning. Contact me by clicking here!

Resources for this information:

The Internal Revenue Service

The US Inflation Calculator

The Vanguard Group