How do 72(t) substantially equal periodic payments work in 2025?

Section 72(t) allows you to take penalty-free distributions from an IRA or 401(k) before age 59 1/2 by setting up a series of Substantially Equal Periodic Payments (SEPP). This is a popular strategy for early retirees.

Three IRS-approved calculation methods:

• Required Minimum Distribution (RMD) method: Divide your account balance by your life expectancy factor from IRS tables. The payment is recalculated each year. This produces the smallest payments and is the simplest method.
• Fixed amortization method: Amortize your account balance over your life expectancy at a reasonable interest rate (not exceeding 120% of the federal mid-term rate). Payments stay fixed each year. This generally produces larger payments than the RMD method.
• Fixed annuitization method: Divide your account balance by an annuity factor derived from IRS mortality tables and a reasonable interest rate. Payments are fixed and typically similar to the amortization method.

Critical rules:

• Payments must continue for 5 years or until you reach age 59 1/2, whichever is LATER. If you start at age 50, you must continue until age 59 1/2 (9.5 years). If you start at age 57, you must continue until age 62 (5 years).
• Modifying payments is extremely risky. If you change the payment amount (other than a one-time switch from method 2 or 3 to method 1), the 10% penalty is retroactively applied to ALL previous distributions, plus interest.
• You can split your IRA into multiple IRAs and apply 72(t) to only one, giving you more control over the payment amount.

Example: A 50-year-old with a $500,000 IRA using the fixed amortization method at 5% interest might receive approximately $28,000-$32,000 per year (depending on the life expectancy table used). This provides penalty-free income for early retirement.

Caution: Consult a tax professional before starting a 72(t) plan. Mistakes are costly and cannot easily be corrected.