How to Use 72t to Retire Early

If you’re looking to retire early, an IRS-approved rule distribution method might be just what you need.

Put simply, 72t is an Internal Revenue Service (IRS) rule that allows for penalty-free, early withdrawal from an individual retirement account, 401k, TSP, 403(b), or 457 plan, when certain criteria are met.


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We’ll go into more detail and give a few examples down below, but the basic requirements call for the withdrawals to be taken as at least five substantially equal periodic payments (SEPP), continuing for five years or until the retirement account owner reaches age 59½, whichever is longer. The allowable amount will vary for each individual owner, based on life expectancy calculated with one of the IRS approved methods.

Normally, there is a 10% penalty fee taken out of any early withdrawal from a retirement account, before the age of 59 1/2. With this rule, even though the withdrawal is still taxed at your regular income rate, the 10% fee is waived, saving you both time and money (when following the process correctly).

Here’s How It Works

financial advisorAs you can imagine, it’s not as simple as simply pulling money out of your account at random. When a 72t distribution is put into action, it needs to be done right, following each IRS requirement.

Let’s go over the three IRS-approved methods: the Minimum Distribution Method (also known as the Life Expectancy Method), Amortization Method, and Annuitization Method.

The Minimum Distribution Method divides the retirement account balance by a divisor from the IRS single or joint life expectancy table. This distribution method results in payments that vary slightly each year, which allows the owner to withdraw the least amount of income possible.

The Amortization Method calculates the yearly distribution numbers by amortizing your account’s balance over single or joint life expectancy. This results in fixed annual payments that may be best for an individual looking to take out as much as possible from their retirement account.

The Annuitization Method uses an annuity factor, which is provided by the Internal Revenue Service, to calculate the substantially equal periodic payments. This method provides a steady, fixed annual payout for the owner.

Comparison of Distribution Methods

Now, tax laws, rates and rules are all going to vary, based on your account and the distribution method you choose to utilize, but let’s look at some numbers as an example, so we can compare the different distribution methods with some real figures:

Distribution Minimum Amortization Annuity
Year 1 $2924 $3681 $3699
Year 2 $3148 $3681 $3699
Year 3 $3400 $3681 $3699
Year 4 $3661 $3681 $3699
Year 5 $3940 $3681 $3699
Total $17073 $18405 $18495

This hypothetical example would illustrate a 50 year old, traditional IRA owner, with an account balance of $100,000, an 8% annualized rate of return, an interest rate of 1.4%, in conjunction with the IRS mortality table. However, market performance will always fluctuate. (source)

As you can see, the distribution methods are fairly similar, but yield different results. When you’re choosing your method, remember to keep your financial goals in mind and always strive toward meeting them with what’s available. Your personal needs and desires should be put above any popular choices.

Rules, Reasonable Interest Rates and IRAs

While the process is actually quite simple, all of the ins and outs can get a little complex.

However, when your goals and unique situation match up, and as long as the requirements laid out by the IRS are met, your withdrawals will process correctly and give you the peace of mind you’re after.

This is why it’s best to ask for help when you’re working with setting up a SOSEPP.

Finding an expert, financial advisor to speak with about choosing an appropriate interest rate, distributing your wealth correctly based on the approved withdrawal methods, and filing all of the required paperwork is highly recommended.

Asking for Help

couple, early retirementWhile a 72t distribution can be filed for and accomplished by yourself with the right paperwork, we strongly recommend working with a professional financial representative that is extremely familiar with SEPP distributions, and how to do them correctly.

Every wealth situation is different, and it helps a lot to have an advisor walking you through the different scenarios, as you keep your goals in mind.

That’s really the key: deciding what’s right for you and your family, as well as your current situation, and committing to accomplishing your goals with the right methods.

Plus, the requirements are requirements for a reason. They need to be met properly or the IRS has the right to apply penalties for substantial periodic payments that aren’t accounted for, as well as tax penalties (most commonly, this is in the event of your IRA running out of funds.)

Pre-planning and proper execution is the key to a successful early distribution that gives you access to the money you need, at the time you need it. When done right, they work great and are uniquely effective. Understanding the risks, as well as the benefits, is a process your financial advisor can take you through step-by-step.

Your Own Personal 72t Calculator

If you’re looking to calculate out an early withdrawal process, but feel confused or have questions, we’d be happy to help you out. We have advisors ready to answer your questions through email, as well as on the phone, so you can plan out and execute your penalty-free retirement today.

Give us a call now at 480-363-5644, or click here to fill in your information on our secure online form. We’ll be happy to get back to you as soon as we can, and explain all of the most important variables that come into play when processing and setting up a withdrawal exception payments. Financial management can be challenging. Partnering with the right group is one of the best ways to find long term success. We look forward to speaking with you.


Updated: 2/07/2019


For a brief overview, you can also check out our “How to Use the 72t Distribution Rule” YouTube video.


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