72(t) Distribution Methods

Taking money from an IRA before age 59½ usually means income tax plus a 10% early-withdrawal penalty. Section 72(t) of the tax code offers a way around the penalty: a series of substantially equal periodic payments (SEPP).

How 72(t) payments work

You commit to a fixed schedule of withdrawals calculated by an IRS-approved method. Once started, the payments must continue for at least five years or until you reach 59½, whichever is later. Changing or stopping the schedule early (a “modification”) can bring back the 10% penalty on everything already taken, plus interest.

The three IRS-approved methods

Required Minimum Distribution method

The account balance is divided by a life-expectancy factor each year, so the payment changes every year. It generally produces the smallest payment. One switch into this method from the others is allowed.

Fixed amortization method

The balance is amortized over your life expectancy at a reasonable interest rate, giving a level annual payment.

Fixed annuitization method

The balance is divided by an annuity factor based on IRS mortality tables and a reasonable interest rate, also giving a level payment.

The IRS sets limits on the interest rate you may use and publishes the life-expectancy and mortality tables. See IRS Notice 2022-6 for the current rules.

Things to weigh

• The schedule is rigid for years; your needs may not be.
• You can set up 72(t) on one IRA and leave others untouched, which adds flexibility.
• Workplace plans have their own rules; separation from service at 55 or later may already avoid the penalty for that plan.
• Calculation errors are costly. Have the numbers checked before the first payment.