SEPP EXPLAINED
What Is 72(t)?
IRS Section 72(t) allows penalty-free early distributions from retirement accounts before age 59½ through a structured SEPP plan. Here's everything you need to know.
The Basics of IRS Section 72(t)
Under IRS Section 72(t)(2)(A)(iv), individuals can take distributions from their IRA or qualified retirement plan before age 59½ without the standard 10% early withdrawal penalty — provided the distributions are part of a series of Substantially Equal Periodic Payments (SEPP).
The payments must be calculated using one of three IRS-approved methods and must continue for at least 5 years or until you reach age 59½, whichever is longer. This makes 72(t) a powerful but commitment-heavy strategy for early retirement.
The Three Calculation Methods
1. Required Minimum Distribution (RMD)
Divides your account balance by a life expectancy factor each year. Produces the lowest distribution amount and recalculates annually. Most flexible but least income certainty.
2. Fixed Amortization
Calculates a fixed annual distribution based on your account balance, age, and an IRS-approved interest rate. Typically produces higher distributions than the RMD method. Amount is fixed for the plan duration.
3. Fixed Annuitization
Uses an annuity factor from IRS mortality tables to calculate a fixed annual distribution. Similar to Fixed Amortization in distribution amount. Amount is fixed for the plan duration.
Key Rules to Know
Why You Need a 72(t) Consultant
A single mistake in your 72(t) plan — wrong interest rate, incorrect calculation, unauthorized modification — can trigger the 10% penalty retroactively on all prior distributions, plus interest. Working with a certified 72(t) consultant is essential to protecting yourself from these costly errors.
Talk to a 72(t) Consultant
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