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

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The Substantially Equal Periodic Payment rule allows you to take money out of an IRA before the age of 59 1/2 and avoid the 10% early distribution penalty tax. This approach is also referred to as 72(t) payments because the rule falls under IRS code section 72(t).

If you choose 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. The following covers each of these three methods and the details 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 five years or until you reach age 59 1/2, whichever comes later (unless you are disabled or die). So, for example, if you begin using the SEPP method at age 52 1/2 (seven years before you turn age 59 1/2), you must continue using the payment plan you established until you reach age 59 1/2. But if you begin using the SEPP method at age 57 (2.5 years before you turn age 59 1/2), then you must follow that payment plan for five years, or until you reach age 62.

If you deviate from your schedule before the appropriate amount of time has passed, the IRS will impose a penalty tax on all amounts withdrawn up to that point.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.
  • Reconsider if you are having financial trouble or issues with creditors. While you can withdraw money from your IRA in an attempt to resolve your financial issues, you could still end up in bankruptcy, and any funds you have taken out of your IRA will have fewer protections from creditors.

Select the Best Option for 72(t) Withdrawals

If neither of the options above applies to you, then it's time to decide what method you'll use for calculating your withdrawals. There are three options, each calculated differently. You don't need to go through these calculations on your own, since you can use one of the online 72(t) calculators listed below, but it's important to understand how the calculations work.

  • Required Minimum Distribution (RMD): Start by looking up your 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 number you'll find on that IRS table, which results in your distribution for the year. This method requires that you recalculate the required withdrawal amount each year based on your new prior year-end balance and attained age.
  • Amortization: This withdrawal method creates an annual withdrawal schedule, 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, and assume a reasonable interest rate. The IRS says you cannot use a rate greater than 120% of the mid-term Applicable Federal Rate (AFR). Then, create an annual payout schedule based on the appropriate life expectancy table—either single life, joint life with your non-spouse beneficiary, or uniform life table (if your spouse is more than 10 years younger than you).
  • 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 for five years or until you reach the age of 59 1/2 (whichever comes later) unless you make a one-time switch to the RMD payout method.

Online 72(t) Calculator

Don't worry about trying 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. It uses the growth rate 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 a 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.

You Can't Customize Withdrawal Amounts—at Least Not Directly

You must use one of the methods described above to calculate the periodic payment amount of your 72(t) payments—the IRS does not offer the option for you to choose your payout amounts.

If you can't use the calculator to get the payment amount you need, you can achieve your desired payment amounts by adjusting the balance in your IRA account. You must increase or decrease your IRA balance—through a rollover from or into another IRA, for example—before you establish your SEPP payments. Once you've started your SEPP payment schedule, you can no longer add or remove funds from your IRA (except for your scheduled payments, of course).