The Ultimate Guide to Early Retirement with Rule 72t Distributions

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.  And if you’re considering an early retirement, this can pose a problem.  Fortunately there are loopholes, including taking 72t distributions in substantially equal periodic payments.


Tax Advantaged Savings


The IRS wants us to save for retirement.  By allowing us to defer taxes in retirement accounts like IRAs, Roth IRAs, and 401(k)s, the government is essentially begging us to improve our own financial futures.

The catch is that we have to keep our money in these accounts until we reach 59 1/2.  Otherwise we’re hit with a 10% penalty, in addition to income tax.

The IRS does provide 9 ways for us to take withdrawals without incurring the penalty:

  • Take withdrawals after 59 1/2
  • Roll withdrawals into another IRA or qualified account within 60 days
  • Use withdrawals to pay qualified higher education expenses
  • Take withdrawals due to disability
  • Take withdrawals due to death
  • Use withdrawals for a qualified first-time home purchase up to a lifetime max of $10,000
  • Use withdrawals to pay medical expenses in excess of 7.5% of adjusted gross income
  • As an unemployed person, take withdrawals for the payment of health insurance premiums
  • Take substantially equal periodic payments pursuant to rule 72t

But it you’re seeking to retire early, you probably don’t want to wait until 59 1/2. And if this is you, most of the loopholes the IRS provides will not apply.

Except for the final loophole, that is.  Rule 72t allows you to take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments” over your lifetime.  Here’s 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’s also very 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.


Calculating Distributions

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
  • Fixed annuitization method
  • Required minimum distribution method

There are several variables that go into the calculations.  You’ll need your account balance on December 31st of the previous year, your life expectancy using IRS mortality tables, and an interest rate.  The interest rate is used if you choose the amortization or annuitization methods, and is based on the federal mid-term rate.  More on this later.

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.

If you do opt for the amortization or annuitization methods, you’re allowed 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.

Here’s more on the calculation specifics:


Fixed Amortization Method:

With this method, you’ll amortize you annual payments in level amounts over a specified number of years.  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.

To create the amortization table, you’ll also need to specify an interest rate.  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:

How to Retire Early With Rule 72t


Annuity Table Method:

Also known as the fixed annuitization method, the annuity table method calculates annual distributions by using an annuity factor.  This method is similar to the amortization method in that you’ll take equal annual distributions until your account goes to $0 (or you pass away).  It’s different from the amortization method in that it’s 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.  You then divide your account balance by this annuity factor to calculate your annual distribution.

Using our example above, Mike’s annuity factor would be 24.6.  Dividing $250,000 by 24.6 gives us $10,128 per year.


Stick with me here, these equations make my eyes glaze over too.  I’ll share some tools to help you shortly.


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 is $252,750.  It’s changed after the first distribution and some asset growth.  His life expectancy would then be 33.2 (assuming the IRS tables haven’t changed), meaning Mike should withdraw $252,750 / 33.2 = $7,612.95.

In sum, Mike has the following options:

How to Retire Early With Rule 72t

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


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 for you 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 will increase your likelihood of running out of money in later years.  Others tell you steer since it’s pretty easy to make a mistake.

Even so, 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


When You Shouldn’t Take 72t Distributions

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

  • You’re unsure 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


72q Distributions

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

Annuities are considered qualified when used in connection with 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, hence the term “qualified”.

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 72q distributions as opposed to 72t distributions.  The parameters are nearly the same.


Some Suggestions When Taking 72t Distributions:

  1. Keep copies of the account statements you used 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.
  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 72t distributions, and a tax consultant when calculating the annual withdrawals.  72t distributions can be very convenient, but cost you a lot of flexibility in the long run.  And with the repercussions of making a mistake, consulting a team of experts is the path of least resistance.




What happens if I don’t take the 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 can make a one-time change to the RMD method.  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?

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.


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.


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.

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