Guide To Rule 72(t) And Substantially Equal Periodic Payments (SEPPs) (2024)

Tax-advantaged retirement accounts provide you with plenty of valuable benefits. In exchange, you agree to lock up your money for the long term.

Need early access to your retirement savings? The Internal Revenue Service (IRS) may charge an early withdrawal penalty. That’s why you need to understand Rule 72(t), which outlines a process by which you can get early access to your retirement savings free of penalties.

What Is Rule 72(t)?

Rule 72(t) refers to a section of the Internal Revenue Code that outlines the process of making early withdrawals from certain qualified retirement accounts—like a 401(k) or an individual retirement account (IRA)—without paying extra penalties.

Your retirement account shelters investments from capital gains taxes and offers certain other tax benefits, with the provision that you don’t take out money until you turn 59 ½. Make early withdrawals before that date, and the IRS will charge you a 10% fee on the amount withdrawn—with certain exceptions.

These exceptions include permanent disability, some medical expenses, inheritance, a first-time home purchase or college tuition payments. If none of these exceptions to you, Rule 72(t) lets you establish a schedule of annual (or more frequent) withdrawals from your retirement account called SEPPs.

What Are SEPPs?

SEPPs are substantially equal periodic payments. When you withdraw money from a qualified retirement account under Rule 72(t), the funds are distributed to you as SEPPs. These regular payments are made over the course of five years or until you turn 59 ½.

Qualified retirement plans eligible for Rule 72(t) include the 401(k), 403(b), 457(b), Thrift Savings Plans (TSPs) and IRAs.

Using Rule 72(t) to set up a schedule of SEPPs is not a simple process, and there are a number of rules to follow:

• You must schedule annual payments. You can schedule several SEPP installments a year, if you like, but you must take at least one a year for five years, or until you turn 59 ½. If you miss even a single payment, you’ll owe the IRS early withdrawal penalties on all funds you’ve already taken out under your SEPP plan.
• You must pay income taxes on money that’s never been taxed. That includes any contributions and earnings in your retirement account—and also includes investment earnings withdrawn from Roth accounts (Roth contributions have already been taxed).
• You cannot withdraw funds from an account managed by an employer for whom you’re still working. Retirement accounts at your present job are not eligible for SEPPs.If you handle SEPPs incorrectly, you’ll be on the hook for the 10% IRS early withdrawal penalty. It’s best to consult with a financial advisor or tax professional before attempting to use SEPPs and the 72(t) rule to withdraw funds from a qualified retirement account.

Related: Find A Financial Advisor In 3 minutes

How to Calculate SEPPs under Rule 72(t)

To begin calculating SEPPs under the 72(t) rule, determine which of the three different IRS life expectancy tables applies to you.

• The Uniform Table applies to unmarried account holders, married account holders whose spouses aren’t more than 10 years younger, and married account holders whose spouses aren’t the sole beneficiaries of their accounts.
• The Joint and Last Survivor Expectancy Table applies for account holders whose spouses are more than 10 years younger and are also the sole beneficiaries of the account.
• The Single Expectancy Table applies to beneficiaries.

Choose the table that applies to you, then decide which of the three SEPP calculation methods is best for your circ*mstances. Each method—minimum distribution, amortization or annuity method—may produce slightly different annual withdrawal amounts.

The Minimum Distribution Method

The minimum distribution method for calculating SEPPs under Rule 72(t) works similarly to determining required minimum distributions (RMDs). It yields the lowest possible withdrawal requirement of the three methods.

Divide your account balance by the number of years the IRS currently expects someone of your age to live, using the appropriate life expectancy table from the options listed above.

The resulting figure is the amount you must withdraw in year one of your SEPP. This amount is recalculated for each of the five years, giving you different minimum distributions each year.

The Amortization Method

The amortization method calculates fixed annual SEPP payments that remain the same over the five-year withdrawal period, with no need to recalculate distributions each year.

To determine the annual amortization payment, select the appropriate life expectancy factor and federal mid-term rate, a special rate the IRS sets for various tax purposes. For the amortization method and the annuitization method below, you must look up the monthly federal mid-term rate to calculate SEPP withdrawals.

The Annuity Method

The annuity method calculates a minimum SEPP withdrawal that remains fixed over the five-year period. It works by factoring your total account balance, an annuity factor provided by the IRS, the federal mid-term interest rate and the life expectancy of the owner of the account.

Get Help Calculating Rule 72(t) SEPPs

As you can see, understanding SEPPs and choosing the right approach can get complicated fast. Any mistakes can incur expensive IRS penalty fees. If you’ve evaluated your options and decided that you need to use Rule 72(t) and SEPPs, consult with a tax pro or a Certified Financial Planner (CFP).

If you’d like to get an estimate of how much you can withdraw using Rule 72(t) SEPPs, check out this handy calculator. Just remember, you’ll likely owe taxes as part of any SEPP withdrawals.

Should You Use Rule 72(t)?

If you are facing a long-lasting financial emergency and have exhausted your other options for getting cash, using 72(t) to access your retirement funds might be worth considering. Just remember, SEPPs can seriously damage your long-term retirement security by depriving your nest egg of future compound investment growth.