How to Use 72(t) payments for Early IRA Withdrawals

Use a series of substantially equal periodic payments for penalty-free access

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The Substantially Equal Periodic Payment rule allows you to take money out of an IRA before 59 ½ and avoid the 10% early withdrawal penalty tax. This approach is also referred to as 72(t) payments because the rule falls under IRS code section 72(t).

In order to use 72(t) payments, also called SEPP payments, you must withdraw the money according to a specific schedule. The IRS gives you three different methods to calculate your specific withdrawal schedule.

Below I cover each of these three methods, and what you need to know before you use any of them. 

Before you start 72(t) SEPP payments from an IRA

When you begin taking 72(t) SEPP payments, you must stick with the payment schedule for 5 years or until you reach age 59 ½, whichever comes later (unless you are disabled or die). If you deviate from your schedule before the appropriate amount of time has passed the penalty tax can be imposed on all amounts withdrawn up to that point. For this reason, before you start a 72(t) withdrawal plan:

  • check to see if you qualify for any of the other exceptions to the IRA early withdrawal penalty, such as exceptions for medical expenses, first time home purchases, etc.
  • be sure you are not in financial trouble and have creditors. While it is possible to withdraw from an IRA in an attempt to "save" things, you can still end up in bankruptcy with no funds preserved for your later years.

    How to Calculate and Select the Best Option for 72(t) Withdrawals

    If neither of the options above applies to you, then check out your options for a series of substantially equal periodic payments. You don't need to actually go through these calculations, as you can use one of the online 72(t) calculators listed below, but it's important to understand how the calculations work.

    1. Required Minimum Distribution (RMD): Start by looking up your attained age on the appropriate IRS table, which will then tell you what divisor to use for your age. You then divide your prior year-end account balance by the divisor and that is your distribution for the year. This method requires you to recalculate the required withdrawal amount each year based on your new prior year-end balance and attained age. This is the only one of the three methods in which the withdrawal amount will vary from year-to-year.
    2. Amortization: This withdrawal method creates an annual withdrawal schedule that is calculated just like the payment schedule on a mortgage. You take the most recently reported account balance (such as the balance on the last quarterly or monthly account statement), assume a reasonable interest rate (IRS says you cannot use a rate greater than 120% of the mid-term Applicable Federal Rate (AFR)), and create an annual payout schedule based on the appropriate life expectancy table (single life, joint life with your non-spouse beneficiary, or uniform life table if your spouse is more than 10 years younger than you).
    3. Annuitization: This option uses a method just like a pension or insurance company uses to determine life annuity payout amounts. You take the most recently reported account balance and divide it by an annuity factor which is published in the mortality table in Appendix B of Rev. Rul. 2002-62.

      Both the Amortization and Annuitization options above result in a fixed annual payout amount and you must stick with that schedule until the longer of 5 years or until you reach the age of 59 ½ unless you make a one-time switch to the RMD payout method.

      Online 72(t) Calculator

      There is no reason to try to calculate these options on your own. Use one of the two online calculators below to calculate all three schedules for you.

      • 72(t) Calculator by CalcXML:  This calculator allows you to assign a growth rate in addition to the “reasonable” interest rate used in the calculation options. The growth rate is used to show you what your account balance will grow to (after applicable withdrawals) if it achieves that rate of return. This calculator also provides a graph and schedule for each option and offers the ability to generate your own PDF report.
      • 72(t) Calculator by Bankrate: This calculator has slide bars that allow you to easily adjust the inputs, but its best feature is the text below the graph, which provides quite a bit of additional detailed information.