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I Have Enough in My Retirement Accounts. Can I Use Rule 72(t) to Retire Early?


Tapping into your retirement savings before age 59.5 typically triggers a 10% early withdrawal penalty in addition to the income taxes you’ll owe. Using Internal Revenue Service Rule 72(t) can help you generate income from your nest egg in your 50s or earlier without paying that penalty. If you use it, you’ll still have to pay regular income taxes, and the process is complicated and inflexible.

Talk to a financial advisor to get personalized guidance on your options for generating retirement income before 59.5.

Rule 72t Fundamentals

Rule 72(t) is a section of the tax code covering early withdrawals from retirement savings plans. This particular rule allows you to take substantially equal periodic payments (SEPPs) from an IRA, 401(k) or other qualified retirement plan without incurring the 10% early withdrawal penalty you would otherwise generally have to pay.

To employ Rule 72t strategy, you must take annual distributions calculated using one of three IRS-approved methods for determining the payment amount. These SEPPS must continue for five years or until you reach age 59.5 – whichever is longer.

You can’t adjust the payment amounts during this time or else you’ll face the penalty you initially avoided. You also can’t make additional withdrawals from the account beyond your scheduled payments. This inflexibility makes Rule 72(t) tricky to use. But for those with adequate savings who want to retire early, it can provide penalty-free income.

Understanding Substantially Equal Periodic Payments

The IRS has a specific interpretation of what constitutes a SEPP. The three methods allowed by the IRS for calculating SEPPs are:

  • Required minimum distribution (RMD) method: This typically produces the smallest annual payment.
  • Amortization method: This spreads your balance over life expectancy to produce a larger payment amount.
  • Annuity method: This provides a fixed mid-range payment between the RMD and amortization methods.

You must calculate payments based on your life expectancy, so the older you are when starting them, the higher the amounts will be.

A Rule 72t Example

To get an idea of how Rule 72t might work in a hypothetical case, consider a retirement saver who is 55 and has $800,000 in their retirement accounts when they decide to retire early. Using the amortization method and a 5% assumed interest rate, they could take annual payments of $49,500 from their accounts for the next 10 years until they turn 65.

By doing this, they would avoid having to pay the 10% early withdrawal penalty, which would save $4,950 for each of the payments until they reach age 59.5.

Talk to a financial advisor about the best plan to finance your retirement.

Rule 72(t) Limitations

While Rule 72(t) offers a path to penalty-free retirement income before 59.5, there are some real and potential limitations to its benefits. They include:

  • You still must pay income tax on distributions at your regular rate.
  • Once started, you can’t discontinue payments without a penalty.
  • Calculating your precise payment involves complex math.
  • You lose tax-deferred growth by withdrawing the money.
  • You can no longer contribute to the account after you start withdrawing from it.

Given these restrictions, Rule 72(t) works best for those who have adequately saved and are sure they want to begin retirement distributions in their 50s.

Rule 72(t) Alternatives

Rule 72t can provide a way to tap retirement funds penalty-free without having to wait, but it’s not the only approach. Other potential options include:

  • 401(k) loans, allowing you to borrow from yourself and repay the money.
  • Using the Rule of 55, which lets you tap a 401(k) penalty-free after leaving an employer at 55 or later.
  • First-time homebuyer withdrawal, permitting a $10,000 penalty-free IRA withdrawal towards buying your first home.
  • Certain other exceptions, such as for higher education costs and some medical expenses.

Each approach has pros and cons to weigh. Hardship withdrawals are still taxed as income but avoid the 10% penalty. 401(k) loans allow access without taxes or penalties but must be repaid. The Rule of 55 only applies to employer plans, not IRAs. A financial advisor can help you weigh your options and make a plan for a comfortable retirement.

Bottom Line

Rule 72(t) allows penalty-free early withdrawals from retirement accounts, but comes with major restrictions. While avoiding the 10% penalty, you still owe income taxes on distributions. Payments are fixed for 5+ years and can’t be changed without penalty. You lose tax-deferred growth and can’t contribute anymore. Given the limitations, Rule 72(t) only works for someone with adequate savings who is fully committed to early retirement.


  • Have a financial advisor walk through the pros, cons and calculations involved with a Rule 72(t) distribution strategy. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s Retirement Calculator helps you determine whether you’re saving enough to retire.

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