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. It also lets you avoid the 10% penalty tax. This approach is also called 72(t) payments because the rule falls under IRS code section 72(t). These payments are also called SEPP payments.

If you choose to use 72(t) payments, you must withdraw the money according to a specific schedule. The IRS gives you three different methods to figure out your withdrawal schedule. Learn more about 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 five years or until you reach age 59 1/2, whichever comes later. (This is unless you are disabled or die.) So, for instance, if you begin using the SEPP method at age 52 1/2 (seven years before you turn age 59 1/2), you must keep using the payment plan you set 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 plan for five years, or until you reach age 62.

If you depart from your schedule before that amount of time has passed, the IRS will impose a penalty tax on all amounts withdrawn up to that point.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. These include 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, you could still end up in bankruptcy. 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. 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.

1. Required Minimum Distribution (RMD)

Start by looking up your age on the appropriate IRS table. The table 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. This 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 age.

2. Amortization

This withdrawal method creates an annual withdrawal schedule. It is calculated just like the payment schedule on a mortgage. You take the most recently reported account balance, such as the one on your last 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. Choose one of the following tables: single life, joint life with your non-spouse beneficiary, or uniform life. (Choose uniform life 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. You can find this 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. You must stick with that schedule for five years or until you reach the age of 59 1/2 (whichever comes later). This is 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. It can also 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. It 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.

What if you can't use the calculator to get the payment amount you need? Then 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.)