Early IRA Withdrawal with No Penalty – 72t Rule Explained

by Neal Frankle, CFP ®

There is an obscure IRS code referred to as “the 72t rule” that can help you make early IRA withdrawals penalty free. Let’s say you want to retire now but you need more income. Further, assume you’d like to tap into your IRA before reaching age 59 ½ and not pay any tax penalties. The good news is that you can do this.

(Keep in mind that this is something you have to be very careful about. If you exhaust your IRA, you may be forced to go back to work. That’s why it’s critical to know how much money you need to retire and plan accordingly.)

As you already know, if you withdraw money from your IRA prior to age 59 ½ the IRS normally slaps you with a 10% penalty on top of the income tax they levy. That’s where the 72t rule comes in.

What is the 72t exception?

It simply states that if you make a series of “substantially equal periodic withdrawals” from the IRA, you won’t be subject to the 10% penalty, even if you are under age 59 ½. So you can generate retirement income even though you aren’t 59 1/2!

The withdrawals must be made at least annually but can be taken more frequently (like monthly). They have to be made for your life expectancy or the joint life expectancy of you and your beneficiary.

You can use one of three methods to calculate your “substantially equal periodic withdrawal.”

1. The life expectancy method. This uses the minimum distribution rules.
2. The amortization method. This uses your life expectancy and a reasonable interest rate determined by the IRS.
3. The annuitization method. This takes your account balance and divides it by an annuity factor. The annuity factor is determined using your life expectancy plus an interest rate.

If you do decide to make this election, you would speak to your IRA custodian to determine the amounts that either election would provide and then take decide which amount suits you best.

Your custodian will ask you to complete a form, and you should keep a copy just in case the kids at the IRS get frisky and want to give you a hard time. You should also keep a copy of your investment statements that you used to determine the amounts of the payments.

When your custodian sends you your payments, they’ll also provide you with a 1099 at the end of the tax year. Hopefully, they’ll code it appropriately so you won’t have to do anything else. If they don’t, you’ll have to file IRS Form 5329 to claim the exemption to the 10% penalty.

If you have several IRAs, you don’t have to apply this rule to ALL your accounts. You can simply use this exception to tap into as few or as many IRA accounts as you like. But there are some IRA restrictions. Once you make your election, the entire balance of that account will be used to calculate your distributions.

Once you do make your election, you have very little control over the payments. You can make adjustments for cost of living, but that’s about it. The payments have to continue for the greater of five years or until you reach age 59 ½. So, if you start this when you are 40, you have to take the payments until you reach 59 ½, which is in 19 ½ years. If you start this when you are 58, you have to keep taking those payments until you reach age 63, which will be five years later.

Once you take payments for the minimum number of years, you can change the amount or stop the payments completely. Use the IRS Form 89-25 to calculate your payments.

The benevolent folks at the IRS do allow you to make changes to your payments if you use the Amortization or Annuitization method without a penalty. But other than that, if you make changes, you’ll face penalties for making changes to the schedule. However, if you use the Minimum Distribution method, your payments will automatically be recalculated each year.

And while we’re at it, make sure to double-check your math. If you make a mistake and don’t take the correct amount, you could be clobbered by the IRS in penalties. Keep in mind that the 72t rules don’t apply if you over-contribute. What happens if you contribute too much to an IRA is an entirely different story.

Have you used the 72t rule to tap your IRA? Why or why not?


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{ 14 comments… read them below or add one }

Diana Furey September 9, 2015 at 12:31 PM

Hello, When initiating the 72T are state and federal the only taxes I must account for? Or must I account for Medicare or social security as well? Thanks


Neal Frankle, CFP ® September 9, 2015 at 7:28 PM

Thanks! Typically, the only withholding is for Federal and State. Obviously, always good to check with your tax pro.

Good question Pilgrim!


George August 15, 2013 at 9:38 AM

When exactly do I become eligible for the 72t exemption………….?
1. At my 55th birthday which is June 11, 2014 or
2. January 1st 2014, first day of calendar year of my 55th birthday.

This will help me decide when to resign from my job. Your advice is greatly appreciated.


Neal Frankle August 15, 2013 at 4:41 PM

You can start this at any age. This info from the IRS


Darrold March 9, 2013 at 4:19 PM

Have 72T in place and need a one time withdrawl for taxes and debt. Can this be done without penalties? Do I have to pay on past monthly withdrawls from 58 years of age? Will I still be able to have monthly withdrawals with out on going penalties?


Neal Frankle March 10, 2013 at 11:14 AM

Darrold. I suggest you speak with a qualified tax specialist. My understanding is that if you go outside the boundaries of the pre-arranged 72T you jeopardize the tax status of the withdrawals.


Carol February 1, 2013 at 9:40 AM

What happens when an individual forgets to take the full amount of their 72t distribution in a single year?


Neal Frankle February 3, 2013 at 11:00 AM

You could be facing a 10% penalty on all distributions retroactively. See your tax advisor ASAP please!


Ron Devos December 5, 2012 at 9:23 AM

What happens if you don’t take the correct 72t distribution amount out of the account? For example, I invested $400,000 at age 56 and have been taking $2,000 a month (which equals 6% – too much?) under 72t for the past five years. Will I be penalized and how will the IRS know to penalize me?


Neal Frankle December 6, 2012 at 5:48 AM

Ron, these are great questions….for your tax advisor. What I have heard from my CPA is that in practice, it’s tough for the IRS to catch these errors. I am going to ask a tax professional to respond to this but my recollection is that the penalties for failure to comply with the 72t requirements are very very stiff. Much worse than the 10% early withdrawal penalty. Another reason to consult your CPA.

Question – how did you get into a situation where your 72t withdrawals were too great? What makes you think they are wrong?


John Qualley August 23, 2012 at 5:04 PM

I am 56-1/2 with 850000 in my 401k. I wish to retire from my job,start distribution, and then go out and work a lower paying job until 62. Is this allowed. Is there a maximum other income I must stay below, like in the case of social security?


Neal Frankle August 23, 2012 at 7:34 PM

In most cases, a 401k will allow you to start withdrawals at age 55 if you separate from service.


Doug Sampson March 22, 2012 at 12:06 PM

Can I get a lump sum payout as a distribution each year?
Can I put the distribution toward debt reduction on my personal residence?
Can I put the distribution toward debt reduction on a rental property investment?


Neal Frankle March 22, 2012 at 12:08 PM

Doug, you absolutely can get a lump sum payout and do anything you like with it.


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