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72(t) Distribution Rules

Important note: This article is simply meant to provide an introduction to the 72(t) rules. If you intend to utilize them, I strongly urge you to work with a professional tax/financial adviser.

What is the 72(t) Rule?

From the IRS FAQ regarding Section 72(t):

“If distributions are made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary, the §72(t) tax does not apply.”

What the heck does that mean?

It means that if you meet a few requirements (which we’ll discuss in a moment) you can withdraw money from a retirement account prior to age 59½ without having to pay the 10% penalty. For investors intending to retire early, this can play a big role in your retirement plans.

It’s important to remember, however, that money coming out of a tax-deferred account will still be taxed as ordinary income, even if you meet the 72(t) requirements. That is, you only avoid the 10% penalty, not ordinary income taxes.

How do you use the 72(t) rule?

72(t) allows you to avoid the 10% penalty by taking a series of (at least) annual distributions from your retirement account. Those distributions must be “substantially equal periodic payments” (SEPPs) calculated — according to methods that we’ll cover momentarily — so as to distribute the entire balance of your IRA over your remaining life expectancy (or the joint life expectancy of yourself and the IRA’s beneficiary).

After you’ve begun taking your 72(t) distributions, you must continue taking them for 5 years or until you reach age 59½, whichever comes later. That means that once you’ve begun the payments, you’re locked in for several years. No changing your mind unless you want to deal with penalties and interest.

Once you’ve been taking the payments for 5 years and you’ve reached age 59½, you can discontinue the payments if you so desire.

Calculating the Distributions

There are three methods for calculating the distributions. You can run the calculations for each of the three methods and use whichever method allows for distributions that best fit your income and tax planning needs.

  1. The Required Minimum Distribution Method,
  2. The Fixed Amortization Method, and
  3. The Fixed Annuitization Method.

There’s no need to do the calculations on your own. Bank Rate has a handy calculator to do it for you.

How about an example?

In 2013, Cathy turns 51 years old. According to the Single Life Expectancy table from IRS Publication 590, her life expectancy is 33.3 years. As of 12/31/2012, her IRA balance was $300,000. If Cathy were to use the Required Minimum Distribution Method to calculate her SEPP, her 2013 distribution will be $9,009, calculated as follows:

$300,000 ÷ 33.3 = $9,009.

If her IRA balance at the end of 2013 is $305,000, her 2014 SEPP will be $9,433, calculated as follows:

$305,000 ÷ 32.3 = $9,433. (32.3 being her life expectancy at age 52.)

Cathy would then continue to make take “substantially equal” distributions, calculated in the same way each year until she reaches age 59½, at which point she could stop, should she want to.

A helpful tool, but be careful.

For those of you planning to retire early, knowing about Section 72(t) can be quite helpful. But this is an area filled with potential pitfalls:

  • Forgetting to take a distribution on time,
  • Forgetting to file Form 5329 (if necessary) to report the exception to the 10% penalty,
  • Choosing a calculation method that is less than ideal for tax planning purposes, or
  • Deciding a few years into your SEPPs (but still a few years away from 59½) that you would have been better off if you’d continued working rather than retiring early.

In short, if you think 72(t) may play a role in your retirement plans, it’s worth taking the time to talk it through with a tax professional.

For More Information, See My Related Book:


Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"


  1. Mike, great post and explanation of what can be a confusing rule! This is a great way to avoid that 10% penalty for those who retire early!!

  2. I am always surprised by how few people actually know about this rule. Great run down, Mike! Thanks.

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