72(t) Distribution
A 72(t) distribution is a series of substantially equal periodic payments (SEPPs) from a retirement account that allows individuals under age 59½ to access retirement funds without incurring the 10% early withdrawal penalty, provided the payment schedule is maintained for a defined period.
Section 72(t) of the Internal Revenue Code provides an escape hatch from the 10% early withdrawal penalty for retirement savers who need income from their accounts before age 59½. By committing to a series of substantially equal periodic payments calculated using one of three IRS-approved methods, an individual can access retirement funds penalty-free at any age — though ordinary income tax still applies to pre-tax distributions.
The three permitted calculation methods are: (1) the Required Minimum Distribution (RMD) method, which recalculates payments annually based on account balance divided by a life expectancy factor — producing the smallest payments; (2) the amortization method, which calculates a fixed annual payment as if the account were a mortgage, using a life expectancy table and an IRS-permitted interest rate — producing larger, stable payments; and (3) the annuitization method, which uses an annuity factor to produce fixed, level payments — generally producing amounts similar to the amortization method.
The catch is commitment. Once started, a 72(t) SEPP program must continue for the longer of five years or until the account holder reaches age 59½. For someone who begins at age 50, they must continue until age 59½ (nine years). If the series is modified, reduced, or stopped before the required period ends, the entire back-history of penalty-free distributions is retroactively assessed the 10% penalty plus interest — a potentially devastating tax bill.
The rigid commitment requirement makes 72(t) a planning tool that demands careful professional guidance. The account balance used for the calculation is typically frozen at the start, though the RMD method recalculates annually. Splitting a large IRA into multiple IRAs before beginning a 72(t) program gives the participant flexibility — only the IRA from which distributions begin is subject to the modification restriction; the others remain available under regular rules (with penalties) if an emergency requires additional access.