Many investors gain penalty-free access to retirement accounts at age 59½. But what if income is needed before then? The Rule of 72(t) provides a legal framework for early withdrawals from retirement accounts without incurring the 10% early withdrawal penalty (ordinary income tax still applies).
Although sometimes called a rule, Section 72(t) of the Internal Revenue Code is more accurately a mechanism that allows for Substantially Equal Periodic Payments (SEPPs) from certain qualified retirement accounts, including IRAs and, in some cases, 401(k)s.
How Section 72(t) Early Withdrawal Rules Work
Section 72 of the federal tax law, authored by Congress, broadly addresses annuities and distributions from qualified retirement plans. Subsection (t) governs the 10% additional tax penalty imposed on early distributions from retirement accounts, as well as the exceptions to that unpleasant fate.
The upside is that the 72(t) option allows investors to take SEPPs before age 59½—without paying the 10% penalty. The downside is that once that lever has been pulled, individuals must continue taking the same amount each year for five years or until age 59½, whichever is longer.
That means an individual who initiates a SEPP at 54 is locked in for 5½ years, whereas someone starting at 58 would be forced to continue until 63. Altering the payment schedule—even accidentally—can trigger the 10% penalty retroactively on all prior withdrawals.
Example: How A 72(t) SEPP Might Work In Early Retirement
Imagine a hypothetical 54-year-old investor, Larry, who has recently retired. He does not qualify for the Rule of 55 and can’t access his employer-sponsored 401(k) without penalty. He’s saved $1 million across two IRAs ($400,000 and $600,000), paid off his mortgage and car, lives in a reasonably affordable city, and has minimal living expenses.
Despite these positives, he needs an additional $2,000 per month ($24,000 per year) to bridge the gap until Social Security kicks in at 62. Instead of withdrawing from both IRAs, he chooses to use the $400,000 account with a 72(t) SEPP.
How 72(t) Payment Amounts Are Calculated
SEPPs can be calculated using three IRS-approved methods:
- Required Minimum Distribution (RMD)–Payments adjust annually based on account balance and life expectancy.
- Amortization–Produces a fixed annual payment based on account balance, interest rate, and life expectancy.
- Annuitization–Converts the account balance into an annuity-like payout.
Most investors choose amortization for the highest fixed payment. Using mid-2025 IRS assumptions (up to 5.38% for SEPPs), Larry could withdraw approximately 5.2%–5.4% of his IRA balance per year. For the $400,000 IRA, that equals roughly $21,000–$22,000 annually, slightly below his $24,000 goal. He would need to supplement with other income or investment strategies.
Using Multiple IRAs In A Single 72(t) Plan
If Larry instead uses his full $1 million across both IRAs for a single SEPP plan, the same amortization method with a 5.3% payout rate yields $52,000–$54,000 per year, comfortably covering his $24,000 target and leaving extra for health insurance, travel, or unexpected expenses.
Weighing Flexibility vs. Income In A 72(t) Strategy
Efficient planning can make a significant difference down the line. Investors may benefit from weighing higher payouts against flexibility. In this case, Larry would need to decide whether it’s more strategic to lock up his full $1 million IRA in a rigid SEPP plan or to use just one portion—like the $400,000 IRA—to cover living expenses until Social Security begins. With the latter option, he’d be able to keep the other $600,000 in reserve for Roth conversions, investment flexibility, or simply to grow untouched.
Selecting the most suitable approach requires careful consideration of current and future financial needs, tax implications, and compliance requirements. One may lead to a higher annual payout, but the other may enable a more conservative way to test-drive early retirement without anchoring everything into the SEPP formula.
Key Considerations Before Starting A 72(t) SEPP Plan
The Rule of 72(t) is a powerful yet binding strategy. Investors in their early 50s holding the majority of their retirement funds in IRAs may find it a practical alternative when they are ineligible to use the Rule of 55 age-based withdrawal provision. However, before deciding to go this route, individuals need to adhere to a disciplined approach. Diligently following the IRS rules is the only way to avoid potentially debilitating fees. x
While some successfully navigate the process on their own, many decide that a trusted financial advisor and CPA are the most effective and least stressful way to craft a 72(t) plan. Either way, when properly implemented, the 72(t) provision can help empower people to retire sooner without incurring penalties.