Introduction to the 72t Rule and Early Distribution

If you are looking to retire early or withdraw money from your IRA (Individual Retirement Account) before retirement you must be familiar with rule 72(t) of the IRS (Internal Revenue Service). The rule allows withdrawals without any risk of penalty from an IRA account if an owner decides to take payments in five substantially equal periods (SEPP) in a row. The amount awarded will depend on the owner’s life expectancy, and will be awarded according to IRS approved calculation methods.

This rule allows an IRA owner to withdraw his funds for retirement before the due date and without having to pay a 10% fee, which is usually the case with early withdrawals. However, the account holder will still be taxed based on his normal tax rate.


According to Section Two of code 72(t), there are exceptions when it comes to making withdrawals early which give owners the chance to take money out of their retirement fund before they reach 59.5 if they are compliant with all SEPP regulations. The SEPP payments have to be made over a time period of five years or until the age of 59.5 years, whichever is longer.

Calculating the Payment Amounts:

The amount that an IRA owner will receive in SEPP depend on the life expectancy which can be calculated through the following IRS approved methods:

1.) The Life Expectancy or Minimum Distribution Method: This method will take a dividing factor extracted from an IRS’s joint life or single expectancy table. It will then divide the retirees’ account balance through this factor. You can use this method to calculate the lowest possible payment amounts that can be awarded.

2.) The Amortization Method: Using this method, the IRA holder’s account balance is amortized over his joint life expectancy table, single life expectancy table or the uniform life and last survivor table. The IRA holder will pick a rate of interest which is no higher than 120% of the midterm federal rate as  published regularly by the IRS. This method determines the largest amount an IRA holder can remove.

3.) Fixed Annuitization Method: Using this method, payments will be calculated through a factor of annuity used by the IRS to calculate either equivalent or nearly equivalent payments in accordance to the SEPP’s rules. Through this method, the payment will usually fall between the lowest and highest payment amounts possible.

Important Notes

One must know that the amount he has calculated are exact figures of payments to be made from the account. According to the rules, it is not allowed to simply choose your own amount.  The amount must be calculated from one of the above methods. Applicants are suggested to use a 72t calculator to make sure there are no discrepancies.

If you wish, you can adjust the amount by adjusting the balance in your IRA. If you have more than one IRA, the funds from one account can be rolled over to impact the amount of payment. It can only be done before establishing the SEPP’s. Once SEPP’s are in place, you cannot withdraw or add any funds except getting SEPP’s.

It is also to be noted that if payments are changed before the required distribution period ends for any reason other than death or disability, then a penalty of 10% with the addition of interest from the year the payments started and ending the year of modification is applicable.