Anybody that talks to me about personal finance or retirement for more than about 10 minutes knows I plan to retire early. How early is to be determined, but I know I don’t want to still be working for pay when I’m 65. There are a few reasons for that, which I will reveal at a later time. Suffice it to say I’m planning to need access to my retirement funds far earlier than normal. That’s why I care about the 72(t) rule, as well as other provisions in US tax law that allow penalty-free early distributions from tax-advantaged retirement plans. The 72(t) rule is one of the methods I plan to use to FIRE! Specifically, the 72(t)(2)(A)(iv) rule. Try saying that ten times fast.
Most Qualified Retirement Plans allow distributions, or withdrawals, once the individual reaches 59.5 years of age. Younger individuals must pay an additional 10% early withdrawal tax unless an exception applies.
Ways to Access Retirement Plan Funds Early
Luckily for people like me, lawmakers have actually allowed quite a few exceptions to taxes on early distributions from retirement plans. I’m only going into details about one in this post, but you can find more details here.
Can we give it up for lawmakers for a second? Those folks don’t get a lot of love, but most of them are actually trying to be helpful.
Moving on….
Here are the current exceptions to additional taxes on early (before age 59.5) distributions from retirement plans:
- Refunds from automatic enrollment (military, keep this in mind as you may deal with this when BRS is implemented!)
- Corrective distributions
- Death
- Disability
- Domestic relations
- Higher education expenses
- Substantially Equal Periodic Payments <—- what we are talking about today
- Dividends passed through an employee stock ownership plan
- Qualified first-time homebuyers
- IRS levies (bummer)
- Paying off medical expenses
- Certain distributions to military reservists called to active duty
- Returned IRS contributions
- Roth rollovers
- Retiring during or after the year the employee reaches age 55
I’m only talking about Substantially Equal Periodic Payments (SEPPs) today, but let me know in the comments if you want to learn more about any of the other exceptions.
I’m Not a Lawyer, But…
The law is relatively easy to understand, here.
If any taxpayer receives any amount from a qualified retirement plan, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:
Distributions which are:
part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary”
Basically, that is saying that early withdrawals are subject to an extra 10% tax, unless they meet certain requirements. In this case, the requirement is to take “a series of substantially equal periodic payments” for the life of the employee.
But wait, there’s more.
You don’t actually have to take the same periodic payment for life. According to the IRS’ “Retirement Plans FAQs regarding Substantially Equal Periodic Payments” page, you only have to take the SEPPs for five years or until you reach age 59.5, whichever is later. So if you start at age 56, you’d have to take SEPPs for five years. If you start at age 50, you’d have to take SEPPs for 9.5 years.
This is the hardest part to accept about SEPPs, by the way. The restrictions on time are a pretty big downside, because it seriously limits your flexibility. But, if you need the money at least you have options.
Calculating Substantially Equal Periodic Payments
How do you figure out how much money you can take out?
There are three main methods:
- the required minimum distribution method
- the amortization method
- the annuitization method
All three methods require the use of a life expectancy or mortality table. The second and third methods also require you to specify an acceptable interest rate.
If you want to go into excruciating detail about how to figure that out, you can read the IRS’ Rev. Rul. 2002-62. Luckily, some very nice people on the interwebs have created calculators that do the work for you. I prefer Bankrate’s calculator.

As an example, I ran the calculator for a $250,000 retirement account balance, accepted the default “reasonable interest rate,” and said I was going to retire at age 41. According to the calculator, I could take out $9,355 per year using the 72(t) rule and SEPPs. Not bad. That works out to about a 3.75% withdrawal rate, which I would consider high for someone so young, but the point is that it can be done without penalty.
(I’ll talk about Safe Withdrawal Rates at a later date. For now, just know that I wouldn’t personally withdraw more than 3% at the start of retirement unless I was at least 50 years old)
Why Use the 72(t) Rule?
Let’s say I decide to retire at age 45. If the 72(t) rule didn’t exist, I would have to put a huge chunk of change into non-tax-advantaged investment accounts in order to pay my bills without having to work for pay, right? Or find some other form of passive income? I wouldn’t want to take any money out of the qualified retirement plans because I’d be hit with a 10% tax penalty. And I would have had to think about this from a very young age, because I’d need to know to put money into non-tax-advantaged accounts from the beginning.
But with the 72(t) rule, I can safely invest my money in tax-advantaged accounts (either Traditional or Roth) and make the decision about when I will retire later, instead of when I am just starting my career. I get a tax benefit, and I get peace of mind. That’s pretty great, right? Now are you ready to give it up for those awesome forward-thinking lawmakers? No? Well, I tried. But the point stands – the 72(t) rule, and specifically the SEPPs, allow people to retire earlier without penalty, and I think that is pretty cool.
Reminder: I am not a tax professional or a financial planner. Before making changes to your personal finances, you should do your own research and/or consult a professional. Read my full disclaimer here.
Thanks for sharing this information, I had no idea! I have a question though. Using your example of receiving a small withdrawal each year when you retire at 41 (Substantially Equal Periodic Payments ), can you still use this method if you are bringing in income from other sources like rental properties, freelancing, etc? I think I understand that you DON’T have to be fully ‘retired” in the sense that you can still pull in new income each year, separate from your pensions, and other retirement accounts….correct?
and one more quick one…once you start taking these payments, do you have to do so every year or you can just take them as you need/want them each year?
Thanks for the comment and questions, Christine!
As far as I can tell, there is nothing preventing you from using SEPPs while you are earning an income from the sources you mentioned. However, from the IRS website: “If these distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply.” In this case the qualified plan they are talking about is your 401k or similar retirement plan. So it sounds like you would have to leave the employer that maintains the plan you want to pull SEPPs from. If you are working for a different company, it shouldn’t be a problem. But definitely check with a tax professional, don’t take my word!
Regarding your second question, you do have to take them every year until either you reach age 59.5 or you’ve taken them for five full years, whichever happens later. Unfortunately you can’t take them as a one time good deal to get you through a couple of low-income years, then go back to not using them. But, you could consider taking the SEPPs every year and reinvesting whatever you end up not using. I wouldn’t do this if, say, you only needed the money for 2 years out of a 20 year period, but if you needed them for 4 years out of a 5 year period it might be worth it. I hope that makes sense.