72(t) Distributions (SEPP)

Section 72(t) of the tax code adds a 10% additional tax to most retirement withdrawals before 59½, and one of its exceptions covers payments that are part of a series of substantially equal periodic payments over your life expectancy. The IRS calls the series a SoSEPP; most people say SEPP or simply 72(t).

You set up a series on one account. You pick an IRS-approved method, a life expectancy table and, for the two fixed methods, an interest rate, then take the resulting amount at least once a year. Monthly or quarterly installments are fine as long as each year’s total matches. The payments are still ordinary income; only the 10% early withdrawal penalty is waived.

The account is ring-fenced while the series runs. You can’t add contributions or rollovers to it or take anything beyond the scheduled amount, and each series is figured from a single account’s balance, never a combined total. That is why people often move just the amount they need into a separate traditional IRA before starting, leaving other IRAs untouched. For an IRA there is no employment condition. For a 401(k), 403(b) or other workplace plan, you must have left the employer before the payments begin.

IRS Notice 2022-6 sets out three methods that automatically qualify, and it governs any series starting after 2022. Series begun before 2022 follow Revenue Ruling 2002-62, and 2022 starts could use either. Each method uses a life expectancy from an IRS table: the Single Life Table, the Uniform Lifetime Table printed in the notice, or the Joint and Last Survivor Table if you include a beneficiary. The Single Life Table gives the shortest period and so the largest payment; at age 52 it shows 34.3 years.

The required minimum distribution method, named after RMDs, divides the prior year-end balance by your life expectancy and is recalculated every year, so the payment moves with the markets and is usually the smallest. The fixed amortization method turns the starting balance into a level payment over your life expectancy at a chosen interest rate. The fixed annuitization method divides the balance by an annuity factor built from an IRS mortality table and lands close to amortization. Under both fixed methods the dollar amount is set once and never changes.

The interest rate may be no higher than the greater of 5% or 120% of the federal mid-term rate for either of the two months before the first payment. Because that ceiling never falls below 5%, a 5% rate is always permitted, and a higher rate means a bigger payment.

A series must keep going, unchanged, until the later of two dates: the fifth anniversary of the first payment, or the day you reach 59½. Start at 50 and you are committed for nine and a half years. Start at 57 and the five-year test governs, so payments run until 62 even though 59½ comes sooner.

The IRS gives exact examples. Someone born August 15, 1968 who takes the first payment on December 1, 2024, at 56, can’t stop or change the series until December 1, 2029, even though they reach 59½ on February 15, 2028. Had the same person started from another account at 52 in December 2020, that series would be free on February 15, 2028, because 59½ came after the five years. After the end date you may stop, change the amount or empty the account as you like.

That commitment is the main drawback of 72(t). The upside is reach: it works at any age and on any IRA, with no waiting period. The cost is rigidity: a payment sized at 50 has to suit your life at 58, whatever happens to markets, work or spending. A Roth conversion ladder works the other way round, asking for five years of patience up front but leaving each later withdrawal up to you.

Taking more or less than the scheduled amount breaks a series, as does adding money to the account or changing method other than by the one permitted switch. In the year it happens you owe the 10% additional tax on that year’s taxable distributions, plus a recapture tax equal to the 10% that would have applied to every earlier payment in the series, with interest for the deferral period.

Suppose a $30,773 series has run for four years and in the fifth you take an extra $10,000. The 10% on that year’s $40,773 is $4,077, and the recapture on the four earlier payments, $123,092 in total, is $12,309. The bill is about $16,386 plus interest, on top of income tax.

Some events are not modifications: death, disability, a final payment that empties the account even if it is smaller than scheduled, and a one-time switch from either fixed method to the required minimum distribution method. That switch is the escape hatch if a market fall leaves a fixed payment draining the account too fast, because the recalculated payment follows the lower balance. It can be used only once, and the series must then continue on that method.

Most failed series trace back to administrative slips rather than the math, and the rules treat an honest slip the same as a deliberate change. Custodians don’t police the series for you, and the Form 1099-R they send may not show the exception, so the job falls to you. The simplest protection is a separate, plain account that pays the same amount on autopilot for the full term. These errors most often trigger recapture: