How to Receive Early Distributions from an IRA without Penalty

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When most people think of taking money out of a non-Roth IRA (Individual Retirement Account), they think of the 59½ rule.

What’s the 59½ rule?

It means that if you take a withdrawal from an IRA before age 59½ you will get hit with a 10% penalty for early withdrawals! The 59½ rule prevents the vast majority of people from accessing their IRA funds because few want to incur the penalty to access the money.

Using the 72t Rule to access retirement funds before age 59½

Most people are unaware of the 72t Rules that allow you to access funds from your IRA before age 59½ without a penalty.

How does a 72t distribution work?

Let’s start with what you can’t do with a 72t distribution. You can’t just come up with any dollar figure you want and withdraw it before age 59½ and avoid the 10% early withdrawal penalty.

Substantially Equal Periodic Payments (SEPP)

When removing money from a tax-deferred account using 72t before age 59½, you have to do so using SEPPs.

What are SEPPs?

It’s a payment that is calculated using a formula to determine the withdrawal you are able to take out each year under the 72t. If you take out more, that money would be subject to a 10% early withdrawal penalty. Payments must last at least five years or until you reach age 59½.

How do you calculate your SEPP payment?

There are three SEPP methods. I’m going to discuss the simplest method used in this newsletter (it typically produces the lowest payment amount).

If you have an interest in exploring whether early payments from a tax-deferred account make sense, please contact us or schedule an appointment with one of our advisors and we’d be happy to set up a call or in-person meeting to discuss its viability (during which we can explore all three ways to calculate the payment to determine which would be best for your individual situation).

Required Minimum Distribution (RMD) distribution method

The RMD method is calculated based on your account balance at the end of the previous year divided by a life expectancy factor (how long you are expected to live). There is also an assumption for the rate of return on the money in your IRA going forward and a specific withdrawal factor (a percentage of the total IRA assets that will be withdrawn). You can use a single or joint life expectancy (age you’ve reached for that year).

Let’s look at an example

Assume you are a 55-year old single male with $200,000 in a roll-over IRA (money was rolled from an old employer’s pension to the IRA). My example person would like to increase his cash flow before reaching retirement and wants to explore a 72t SEPP distribution from his IRA.

How much would he receive each year?

$6,757 (to calculate this amount I used a 5% assumed rate of return on money in the IRA and a 4% withdrawal factor).

Taxes are due on the distribution but there is NO 10% penalty for early withdrawal.

Recalculate every year

To determine the allowed withdrawal amount the example client will be able to take out every year, you take the account value at the end of the year again and apply the assumed rate of return and withdrawal factor. If the assumed rate of return turned out to be accurate, the payment in year two would be the same. That won’t be the case most of the time, but as a general statement, the amount this example client will be able to withdraw every year from ages 55-59 should be similar to the first year withdrawal of $6,757.

Market crash

If, for example, the example client had his money in market-based investments (like the S&P 500 index, large cap, medium cap, or small cap mutual funds), there is the risk that a 2000-2002 (over 40% decline) or 2007-2009 (over 50% decline) stock market crash could occur. If that happens, it would reduce his 72t payments accordingly.

Other methods

The other methods of calculating the 72t payment are the fixed amortization method and fixed annuitization method. With both of these methods, the annual 72t distribution would be approximately $10,000 in the above example.

Our firm takes great care to make sure our clients use wealth-building tools that will protect them from large downturns in the market. To learn more about how we accomplish this, please check out other parts of our website, like the Financial Planning page and the Asset Protection page.


Your IRA is essentially frozen while you take 72t distributions (meaning that when you are receiving payments, you can’t take make contributions and can’t take other withdrawals).

Reaching 59½

When you reach age 59½ your 72t distribution restrictions are turned off and you can take as much money out of your IRA as you’d like without a 10% penalty.

Are 72t distributions a good idea?

It depends on the situation. For some people it will make sense and for some it won’t.

Again, if you would like to discuss whether a 72t distribution from your IRA or qualified retirement plan make sense, please contact us or schedule an appointment with one of our advisors and we can set up a time to talk about your personal situation.

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