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What is a 72t Withdrawal and is it Right For Me?

Financial circumstances can shift unexpectedly to where you might end up digging into your savings accounts. Sometimes the necessity to cover bills and expenses today outweighs the benefits of saving for tomorrow. After all, you cannot save for tomorrow without providing for today. what is a 72t withdrawal and is it right for me

If you have an IRA or another tax-advantaged retirement account such as a 401(k), you can make an early withdrawal through what’s called Rule 72t. This article will explain the basics of a Rule 72t withdrawal so that you can better determine if it is right for you.

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What is a Rule 72t Withdrawal?

Rule 72t allows for a penalty-free withdrawal from numerous types of retirement accounts. You can apply Rule 72t to IRA, 401(k), and 403(b) accounts. In most cases, withdrawing from a retirement account before you reach the age of retirement results in a penalty. 

This penalty usually sits around 10 percent of the withdrawn funds. These penalties exist to discourage investors from using up funds designated for long-term savings.

Rule 72t bypasses these early withdrawal penalties. However, you will still have to pay the appropriate income taxes on the withdrawn amount. Rule 72t has some stipulations to it. You must first meet certain qualifications.

How to Qualify for Rule 72t

Rule 72t is always a last resort and you should only pursue this withdrawal after exhausting all other financing options. In order to qualify for a Rule 72t withdrawal, you must agree to take at least five Substantially Equal Periodic Payments (SEPPs). This means that for at least five years you will receive a payment amount from your retirement funds. 

The payments continue for five years or until the account holder reaches 59 ½ years of age. The longer always applies. This means that once you agree to the terms of a Rule 72t, you will receive payments for the rest of your working life. In most cases, you cannot apply a SEPP plan to a 401(k) account you hold with your current employer.

Calculating Payment Amounts

Before considering a Rule 72t, you must first calculate the value of your payments. Three calculations exist which the IRS allows you to choose from.

Amortization Method

With this method, you gradually work down the value of your retirement account until it reaches zero at the end of the specified payment period. The amortization method results in equal distributed payments every year. The total length of the payment period is calculated to correlate with the account holder’s life expectancy.

The IRS uses a number of tables to determine predicted life expectancy. You can find the tables on their website. With this method, you will also have to account for an interest rate. Pick any interest rate you like so long as it stays within 120 percent of the federal mid-term rate as established one of the two months prior to the beginning of the payments.

Annualization Method

The annualization method also results in equal annual payments. The amount of the payments is found by using an annuity based on the account holder’s age and their beneficiary’s age. Much like the amortization method, you can pick an interest rate. You also will use the same IRS tables to determine life expectancy. 

You can use Microsoft Excel to calculate the annuity factor with the formula: =PV(Rate, Number of Periods, Payment, Future Value, Type).

Required Minimum Distribution Method

In this method, payment methods will be calculated for each and every year. You can find the expected payment amount by dividing the account balance by the life expectancy of the account holder or their beneficiary. 

If you intended to use the Required Minimum Distribution method, plan on calculating a different payment amount for each year. This method accounts for changes in one’s health which may shorten or lengthen the account holder’s life expectancy. 

Recipients using this method tend to receive lower payment amounts than the other two methods. This might have advantages if you want to stay within a specific tax bracket.

You can check out our article to learn about how the Required Minimum Distribution rules relate to IRAs.

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When to Use Rule 72t

Taking advantage of Rule 72t allows you to bolster your income with funds from your retirement account. This can help you account for changes in expenses, or might even help you if you want to retire early. Before you consider retiring, you need to make a retirement transition plan so that you can enjoy these relaxing years. 

If one of the following factors applies to your specific financial situation, a 72t withdrawal might work for you.

Early Retirement

So you have worked hard and now decide to reward yourself with an early retirement. First and foremost, congratulations! Now you can enjoy the fruits of your labor and shift your efforts away from working. However, most retirement accounts come with the stipulations and expectations that you will not retire until at least 59 ½ years of age.

Trying to access your retirement funds before this age will result in a 10 percent penalty. This amount might immediately crush your dreams of early retirement. A SEPP plan through Rule 72t will allow you to take out funds early so that you can retire sooner.

Most account holders who take advantage of Rule 72t do so to retire a few years earlier. Use one of the above methods to calculate your annual payment amount so that you can determine your retirement income. Knowing exactly how much you will have each year will help you plan for a long and happy retirement. 

Unexpected Expenses

Sometimes life throws a curveball at you in the form of some sort of unexpected expense. You can use a 72t to bolster your income to get you through a tough financial situation. However, once you decide on a Rule 72t you will be locked into it until the payment period is complete. 

Before you consider digging into your retirement funds to cover today’s expenses, you need to exhaust all other options of financial support. The sooner you lock yourself into a SEPP plan, the more serious the implications of that decision will be.

In some cases, it makes sense just to dig into your retirement account a little early and take the penalty rather than locking yourself into a SEPP plan. Speak with a financial advisor before deciding on a Rule 72t withdrawal so that you can make sure you have exhausted all other financial options.

Drawbacks to Rule 72t

Locking yourself into a SEPP plan can have some serious financial repercussions. So before you start messing with your retirement accounts, keep these disadvantages in mind. Some of them might outweigh the perceived benefits of a Rule 72t withdrawal. 

Once You’re In, You’re In

Backing out of a SEPP plan is nearly impossible. If you try to back out you will have to pay penalties on all of the amounts you have already withdrawn. And on top of those penalties, expect to pay interest on that amount as well. 

In most cases, you will have spent the money you received from your payments already to cover living expenses. So unless you have the liquid capital to buy your way out of the SEPP plan, you will be stuck with it for life.


If you pick the amortization or annualization method for payment dispersal, you will have to stick with those payments for the rest of life or the period of the payment plan. Therefore, you will not have the option to dig into your accounts for a boost in cash or refinance for a lower payment amount. The amount you determine will follow you until the plan concludes.

The Required Minimum Distribution method offers some flexibility when it comes to annual payment amounts. This means that you will calculate your payment amount each and every year. 

While this can help you adjust depending on your circumstances, it also means that you will have less of an ability to fully prepare for the future. And not knowing annual income during retirement can cause a lot of stress. Stress greatly affects the quality of your retirement.

No More Retirement Contributions

Once you start with a Rule 72t withdrawal, you can no longer contribute to it. This means that the earlier you decide to withdraw funds the less you will have to withdraw. Retirement accounts are meant for long-term savings, so digging into them too early eliminates their purpose.

Check out this year’s annual retirement plan contribution limits, and start investing as much as possible for your future. 

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If you think you might want to retire early or just want to see how well you are preparing for retirement, take NextGen Wealth’s free Retirement Readiness Quiz. The more you know about your retirement situation, the better you can plan for tomorrow.
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About the Author

Aurtho Clint Haynes, CFPThis article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.

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