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Taxes & accounts72(t) SEPP rules, explained
A 72(t) plan, or SEPP, lets you take money from an IRA at any age without the 10% additional tax, as long as you take substantially equal periodic payments worked out with an IRS method. At 50, with $500,000 at a 5% rate, the fixed amortization method pays $30,156 a year.
The three IRS methods
- Required minimum distribution method. Balance ÷ life expectancy, recalculated every year. At 50 with $500,000: $500,000 ÷ 36.2 = $13,812 in the first year.
- Fixed amortization. The balance paid out like a loan over your life expectancy at a chosen rate: $30,156 a year at 5%, the same every year.
- Fixed annuitization. Balance ÷ an annuity factor from an IRS mortality table; it usually lands close to amortization.
The interest rate may be any rate up to the greater of 5% or 120% of the federal mid-term rate for either of the two months before the first payment (IRS Notice 2022-6).
Payment by interest rate
| Interest rate | Amortization at 50 | Amortization at 55 |
|---|---|---|
| 3% | $22,831 | $24,710 |
| 4% | $26,377 | $28,152 |
| 5% | $30,156 | $31,807 |
| 6% | $34,142 | $35,655 |
For $500,000, with the IRS Single Life Expectancy Table (36.2 years at 50, 31.6 at 55).
How long payments must last
For 5 years or until you reach 59½, whichever is later. Starting at 50 that is 9½ years; starting at 57, 5 years, to 62. During that time the account cannot take new money in or send it out except for the payments.
Breaking the schedule
If the payments change before the end, other than a one-time switch to the RMD method, the 10% additional tax comes back on every payment taken so far, plus interest. That is why many people split an IRA first and run the 72(t) from a part sized for the payment they need.
Questions people ask
What is 72t and how does it work?
Section 72(t) of the tax code exempts substantially equal periodic payments from the 10% additional tax on early withdrawals. You choose an IRS method, calculate the payment from your balance and life expectancy, and take it every year on schedule.
How long do you have to take 72t distributions?
Until the later of 5 years after the first payment or the day you reach 59½.
What is the 72t rule for 401k?
It also applies to workplace plans, but only after you leave that employer. Most people roll the money into an IRA first, where the provider can run the payments.
Related
The 72(t) calculator runs the numbers. The rule of 55 and the Roth conversion ladder are the other common routes before 59½.
This is an explanation of the IRS rules, not tax advice. A 72(t) plan is hard to undo; check it with your provider or a tax professional. See the disclaimer.
Sources
- Internal Revenue Service, Notice 2022-6, determination of substantially equal periodic payments.
- Internal Revenue Service, Retirement plans FAQs regarding substantially equal periodic payments.
- Internal Revenue Service, Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
- Internal Revenue Service, Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs.
Keep reading
- How much do I need to retire at 45?
The portfolio for a 50-year retirement by spending level, the bridge to 59½ and where Social Security fits.
- How to retire early, step by step
Spending, your number, savings rate, the bridge to 59½ and health insurance, with the math at each step.
Last reviewed by Asier Fernández, editor, on . Educational information only, not financial advice. How we calculate