72(t) SEPP Calculator

Section 72(t)(2)(A)(iv) exempts a series of substantially equal periodic payments from the 10% early distribution tax. It is the main route to spending an IRA before 59½, and it is the one most early retirees have heard of.

What gets underweighted is that it is a binding commitment rather than a withdrawal strategy. Once payments start they must continue, in the same amount and on the same schedule, until the later of five years and the date you turn 59½. Stopping early, changing the amount, rolling the account over or taking an extra distribution from it all count as modifications.

The penalty for modifying is not prospective. Under section 72(t)(4) the 10% tax is applied retroactively to every payment already taken, plus interest for the deferral period. Someone who started at 50, took nine years of payments and then needed a lump sum in year nine faces a bill on the whole nine years.

The exceptions are narrow: death, disability, complete exhaustion of the account, and a one-time switch from either fixed method to the RMD method. That last one is the genuine escape valve, and it is worth knowing before you start rather than after.

Three methods are permitted. The RMD method divides the balance by life expectancy and is recalculated every year, so the payment moves with the account — smallest payment, most flexibility. The two fixed methods, amortization and annuitization, produce a level payment fixed at the outset, typically more than double the RMD figure.

The rate you may use for the fixed methods is capped at the greater of 5% or 120% of the federal mid-term applicable federal rate for one of the two months before the first payment. Notice 2022-6 introduced that 5% floor, and it was a significant liberalisation: in a low-rate environment the AFR-only cap had made fixed-method payments punishingly small.

The lever that matters most is not the method at all. The balance used may be determined in any reasonable manner, and there is no requirement to dedicate the whole account. The standard practice is to split an IRA into two before starting, run the schedule on the piece that produces exactly the payment you need, and leave the rest untouched and unencumbered. That preserves both flexibility and a source of emergency money that is not subject to the modification rules.

For someone leaving a job at 55 or later, a 72(t) schedule is frequently the wrong instrument. The rule of 55 allows penalty-free withdrawals from the employer plan you just separated from, in any amount, on any schedule, with no commitment and no modification risk.

The catch is that it applies only to a workplace plan and only to the plan of the employer you separated from — not to an IRA, and not to a plan from an earlier job. This produces a common and expensive mistake: rolling a 401(k) into an IRA on leaving, which is the reflexive advice, permanently forfeits the rule of 55 for that money and leaves 72(t) as the only route.

The practical sequence for anyone separating at 55 or later is to leave the money in the plan until they are past 59½, use it as needed, and roll over afterwards. A 72(t) schedule then only makes sense for money already in an IRA, or for someone retiring well before 55.