The Rule of 72(t): Penalty-Free, Early Withdrawals

October 10, 2025

Saving in a workplace plan or individual retirement account (IRA) offers several key benefits. One of the biggest is the ability to grow your money on a tax-deferred basis—potentially boosting your savings until you’re ready to retire. But life doesn’t always follow a straight path, and sometimes people need to access those funds earlier than expected.

If you’re under age 59½, most early withdrawals from a retirement account trigger a 10% penalty on top of regular income taxes. However, there’s an exception known as the Rule of 72(t), which allows for penalty-free early withdrawals if they follow a specific schedule of Substantially Equal Periodic Payments (SEPP), also called a SEPP plan.

These payments must continue for at least five years or until you reach age 59½—whichever is longer—and must follow precise IRS rules to remain penalty-free.

What Is the Rule of 72(t)?

The Rule of 72(t) refers to a section of the IRS tax code that governs retirement account withdrawals. It provides an exception for people who need access to their funds before age 59½, allowing them to avoid the 10% early withdrawal penalty by following an approved SEPP schedule.

In short, this rule makes it possible to create an income stream from your retirement savings before traditional retirement age, as long as you follow the rules carefully.

What Is a SEPP Plan?

A SEPP plan sets up a series of regular, predictable withdrawals—taken monthly, quarterly, or annually—from your IRA or workplace plan. These payments are based on an IRS-approved calculation and must remain consistent for the entire payout period.

Each SEPP plan applies to one specific account. If you want to withdraw from multiple accounts, you’ll need to establish separate SEPP plans for each.

Once the plan begins, you can’t change or stop payments early without triggering a retroactive penalty on all prior withdrawals (except in limited cases, such as disability or death).

How the Rule of 72(t) Works

When setting up a SEPP plan, you’ll calculate how much to withdraw using one of three IRS-approved methods. The payments must continue for at least five years or until you reach age 59½. You’ll still owe income tax on each withdrawal, but not the 10% penalty.

If you alter or discontinue the plan early, the IRS may impose a “recapture” penalty, applying the 10% early withdrawal penalty to all distributions made under the plan.

IRS-Approved SEPP Calculation Methods

Required Minimum Distribution (RMD) Method

Uses your life expectancy based on IRS tables to calculate withdrawals. Because the calculation is tied to your age and account balance, the withdrawal amount changes each year. This method usually results in smaller payments—ideal for those who need only modest income and want to preserve more assets for long-term growth.

Fixed Amortization Method

Determines a fixed annual payment based on your account balance, life expectancy, and an interest rate (up to the greater of 5% or 120% of the federal mid-term rate). Payments remain constant for the entire term, and they’re generally higher than RMD payments.

Fixed Annuitization Method

Uses an IRS annuity factor derived from mortality tables to calculate a steady payment amount. These withdrawals are typically larger than RMD-based payments but smaller than amortization payments.

Tax Implications

All SEPP withdrawals are treated as ordinary income and taxed accordingly. The key advantage is avoiding the 10% penalty—not avoiding income tax altogether. Because the rules are complex and irreversible once started, it’s wise to consult a tax or financial professional before committing to a plan.

Benefits of Using the Rule of 72(t)

●     Avoids early withdrawal penalties: Lets you access funds before age 59½ without the 10% penalty.

●     Creates a steady income stream: Provides predictable cash flow that can serve as an income bridge before Social Security or pension benefits start.

●     Offers flexibility in setup: You can choose the calculation method and payment frequency that best align with your needs.

Drawbacks to Consider

●     Reduces long-term retirement savings: Taking funds early may leave you with less later in life.

●     Inflexibility: Once a SEPP plan begins, payments can’t be changed or stopped without triggering penalties.

●     No extra withdrawals: Taking more than your scheduled payment subjects the entire plan to penalties.

Alternatives to the Rule of 72(t)

Before starting a SEPP plan, consider whether other penalty-free options might better fit your situation:

●     Qualified exceptions: Certain early withdrawals from IRAs or 401(k)s are exempt from penalties (for education expenses, disability, or health insurance while unemployed).

●     401(k) loans: If still employed, you may be able to borrow up to 50% of your vested balance (maximum $50,000) without taxes or penalties, provided it’s repaid on schedule.

●     Rule of 55: If you leave your job in or after the year you turn 55, you can take withdrawals from your 401(k) without penalty (though not from an IRA).

Who Might Benefit from a SEPP Plan?

The Rule of 72(t) may make sense for someone who:

●     Retires early or leaves work before age 59½

●     Needs income before other retirement benefits begin

●     Has sufficient savings to meet long-term goals

●     Is in poor health and expects a shorter retirement horizon

The Bottom Line

A SEPP plan under the Rule of 72(t) can offer an important lifeline for early retirees or those facing unexpected financial needs. But it’s a complex and rigid strategy that requires careful modeling and professional guidance.

Before making any move, talk with your financial advisor or tax advisor to determine whether a SEPP plan fits your situation—and how it may affect your long-term retirement outlook.

Sources:

https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments

https://www.fidelity.com/learning-center/personal-finance/72t-rule

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.