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Penalty Free Access to Retirement Funds with Rule 72(t)

By Dina Siracusa IAR, CDFA, MBA

COVID-19 has had a tremendous effect on many Americans. The financial impact has been felt across the board for hard working Americans, regardless of their socioeconomic status.

If you have been negatively financially impacted by this pandemic, you might find yourself in a situation where you are forced to modify your lifestyle, decrease your spending, etc. Some have found themselves in quite a financial bind.

Most investors understand that it is a good idea to save money in tax-deferred retirement accounts such as Employer sponsored 401(k)’s, 403(b)’s, 457, and IRA’s. We understand that per the IRS rules, we cannot access those accounts until age 59 ½ without incurring a 10% penalty for premature distributions. If you find yourself in a situation where you need to access these funds, you may be wondering what are my options?

What you may not be aware of is an exception to this rule called 72(t).

Rule 72(t), issued by the IRS, allows penalty-free withdrawals from tax advantaged accounts like employer sponsored 401(k)’s as well as IRA accounts. The rule enables holders of these accounts to access their funds prior to age 59 ½ without incurring a 10% penalty.

Rule 72(t) refers specifically to IRS code 72(t) section 2. Per IRS code, there are exceptions that allow account holders to make withdrawals penalty free as long as certain conditions, referred to as SEPP regulations, are met. There are other IRS exemptions that can be used for purchasing a house, medical expenses, disability, college tuition payments, etc. To take advantage of this rule using the SEPP exception, the account holder must take a least 5 substantially equal periodic payments(SEPP). The payment amounts are determined based on the owner’s life expectancy, per the IRS approved methods of calculation. The IRS designates 3 methods to calculate this:

  • The annuitization method

  • The amortization method

  • The minimum distribution method (life expectancy method)

These equal periodic payments must occur over the course of 5 years or until the account holder reaches 59 ½, whichever period is longer. These payments are subject to the owner’s normal income tax rate.

An example of using Rule 72(t) is consider you are a 55 year old woman who has an IRA earning 4.5% with a balance of $400,000. You want to withdraw your money early utilizing the Rule 72(t) exception.

Using the amortization method, this woman would receive approximately $18,283 in equal annual payments. Using the annuitization method, approximately $18,191 would be her annual payment amount. With the minimum distribution method, she would receive about $13,515 annually over a 5 year period.

Remember though that commitment to these annual payments is essential. If you do not continue your payments, deviate from your schedule, or modify the withdrawals in any way, you no longer qualify for exemption from the 10% penalty.

Keep in mind, accessing retirement account funds should be a last resort. That is why the IRS has stipulation exceptions for unforeseen circumstances. If you are in a temporary bind and need access to your money Rule 72(t) is an alternative. Some investors who are in a position to retire early(prior to age 59 ½) and have the majority of their liquid assets in retirement accounts, also can utilize Rule 72(t).

If you are considering 72(t) payments and think this option is one that suits your needs, be sure to consult with a financial advisor or CPA. It is absolutely essential to do this under the guidance of a knowledgeable professional to help calculate withdrawals accurately and confirm that you qualify for this early distribution penalty exemption via rule 72(t). Utilizing this withdrawal method is a commitment that has significant penalties if not done correctly.

For more information call Dina Siracusa at 281.466.4843.


This material is for general information and education purposes only.  Information is based on data gathered from what we believe are reliable sources.  It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.  It should also not be construed as advice meeting the particular investment needs of nay investor.

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