72(t) substantially equal periodic payments

Also called SEPP

A series of fixed, IRS-calculated withdrawals that lets people take money from retirement accounts before 59½ without the 10% penalty.

What it means

Section 72(t) of the tax code allows penalty-free early withdrawals if they are taken as substantially equal periodic payments. The yearly amount is set using one of three IRS-approved methods, based on the account balance, life expectancy and an interest rate within IRS limits. It is most often used with IRAs; for an employer plan, the person must have left that employer.

Once started, the payments must continue unchanged for five years or until age 59½, whichever is later. Changing them, skipping one or adding to the account generally triggers the 10% penalty on every payment taken so far, plus interest. Regular income tax applies to each payment.

Example

Suppose someone starts $30,000 a year of 72(t) payments at 50 and changes the schedule at 56 after six payments. The 10% penalty applies retroactively to all $180,000, or $18,000, plus interest.

How it’s used

Early retirees whose savings are mostly in IRAs
Creating steady income before 59½
Tapping savings when the rule of 55 does not apply

Strengths and weaknesses

Strengths

Avoids the 10% early withdrawal penalty
Works with IRAs at any age
Provides predictable income

Weaknesses

Very rigid for many years
Retroactive penalty for any mistake
Payments are still taxable
Can drain savings needed later

Good to know

Splitting IRAs first allows the plan to use only part of the savings, leaving other accounts flexible.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.