A 72(t) distribution is an IRS rule that lets you withdraw money from an IRA or eligible retirement plan before age 59½ without paying the 10% early withdrawal penalty. To qualify, you must take Substantially Equal Periodic Payments (SEPPs) for at least five years or until age 59½—whichever is longer.
This rule is often used by early retirees, business owners, and individuals who need penalty-free access to retirement savings while still maintaining IRS compliance.
How Does a 72(t) Distribution Work?
A 72(t) distribution works by setting up a structured withdrawal plan based on your life expectancy and account balance. In the first sentence:
A 72(t) plan works by requiring you to take annual withdrawals calculated using one of three IRS-approved SEPP methods, and you cannot change these once they begin.
Once the SEPP plan is in place:
- Payments must continue every year
- Amounts must follow the selected formula
- Stopping or adjusting the plan triggers penalties
Because the IRS heavily audits improper 72(t) setups, taxpayers usually work with a CPA or advisor to avoid errors.
What Retirement Accounts Qualify for 72(t) Withdrawals?
You can use 72(t) distributions with most IRA-based accounts, including:
- Traditional IRA
- Roth IRA (earnings only)
- SEP IRA
- SIMPLE IRA
For employer plans like 401(k), 403(b), or 457(b), you may only use 72(t) if:
You have already separated from the employer that sponsors the plan.
You cannot start a 72(t) plan from a retirement plan at your current job.
What Are Substantially Equal Periodic Payments (SEPPs)?
Substantially Equal Periodic Payments are the fixed or recalculated annual withdrawals required under Rule 72(t).
SEPPs must:
- Be taken at least once yearly
- Follow strict IRS formulas
- Continue for five years or until age 59½, whichever is longer
For example: If you start SEPPs at age 57, you must continue until 62, not 59 1⁄2. If you start at 52, you must continue for the full five years, until age 57.
Interrupting payments or modifying the amount (except for the one IRS-allowed switch) results in retroactive penalties on all previous withdrawals—plus interest.
What Calculation Methods Are Allowed for 72(t) Plans?
The IRS allows three methods for calculating SEPPs. The method you choose determines how much income you receive annually.
Required Minimum Distribution (RMD) Method
- Lowest annual withdrawals
- Recalculated each year
- Uses current account balance + IRS life expectancy tables
- Most flexible if balances fluctuate
This is the most conservative method and often chosen by taxpayers who want to preserve retirement assets.
Amortization Method
- Fixed annual payments
- Usually results in higher withdrawals than RMD
- Uses life expectancy and an interest rate
- Creates predictable, steady income
This is common for taxpayers who need consistent cash flow during early retirement.
Annuitization Method
- Fixed payment similar to annuity income
- Uses an IRS-approved annuity factor
- Amount usually falls between RMD and amortization results
This method is popular for clients transitioning from earned income to steady retirement income.
Why Do Taxpayers Use a 72(t) Distribution?
Taxpayers use 72(t) plans when they need early access to retirement savings without IRS penalties.
Typical scenarios include:
- Early retirement before age 59½
- Job loss or career transition
- Needing income to support a new business
- Funding a move, divorce, or life change
- FIRE (Financial Independence, Retire Early) strategies
- Bridging the gap until Social Security or pensions begin
A well-designed SEPP plan can provide dependable income during critical transition periods.
Is a 72(t) Distribution a Good Idea for You?
In the first sentence:
A 72(t) distribution is a good idea if you need structured, penalty-free income from your retirement account and you can commit to a long-term schedule without interruption.
It is often ideal for:
- Early retirees (especially ages 50–59½)
- Business owners with fluctuating income
- Individuals with a large IRA balance
- Those bridging income until Social Security or pension benefits
However, a 72(t) plan may not be wise if:
- You have limited retirement savings
- Your financial needs are unpredictable
- You expect major life changes
- You prefer investment growth over withdrawals
A CPA can run projections to compare the long-term financial impact of SEPPs versus leaving assets invested.
How Does a 72(t) Distribution Compare to Other Withdrawal Options?
| Withdrawal Option | Penalty-Free? | Best For | Notes |
| 72(t) SEPPs | Yes | Early retirees | Long-term commitment |
| Roth IRA contributions | Yes | Flexible liquidity | Contributions only |
| 401(k) loans | Yes | Short-term needs | Must repay with interest |
| Hardship withdrawals | Sometimes | Emergencies | Must meet IRS criteria |
| IRA $10,000 home purchase exception | Yes | First-time buyers | Limited amount |
A 72(t) plan is the most structured and long-term strategy among penalty-free options.
Need Help Setting Up a 72(t) Distribution?
A 72(t) plan can save thousands in penalties—but even a small error can trigger IRS back taxes.
If you’re considering early retirement or need penalty-free access to your IRA:
Contact Dimov Tax today for expert SEPP calculation, IRS-compliant setup, and long-term planning support. We help individuals, business owners, expats, and high-net-worth taxpayers make the right tax decisions with confidence.
FAQ About 72(t) Distributions
At what age can you start a 72(t)?
You can start a 72(t) distribution at any age, as long as the funds are in an IRA (or in a 401(k) after you’ve left the employer). There is no minimum age requirement—the rule simply allows you to avoid the 10% penalty when withdrawing before age 59½. Most people begin 72(t) between ages 40 and 59½, usually when retiring early or needing structured income.
Can you work while taking a 72(t) distribution?
Yes, you can work while taking a 72(t) distribution. The IRS does not restrict employment or income while you receive SEPP payments.
How much can I take out with 72(t)?
Typical annual withdrawals range from 3% to 7% of the account value, but exact amounts vary. The amortization method often gives the highest withdrawals; the RMD method gives the lowest.
How long will $500,000 in a 401(k) last at retirement?
How long $500,000 lasts depends on your annual spending, investment returns, and inflation. A simple estimate uses the 4% Rule, which suggests you can withdraw about $20,000 per year and reasonably expect the money to last 30 years.