72(t) SEPP

Explanation

A 72(t) plan, or SEPP (substantially equal periodic payments), lets you withdraw from an IRA, or from a former employer’s plan, at any age without the 10% penalty. Income tax still applies. The IRS allows three ways to calculate the annual payment:

• RMD method: balance ÷ life expectancy factor, recalculated each year. Lowest payment, and it changes with your balance.
• Fixed amortization: the balance is amortized like a loan over your life expectancy at a reasonable interest rate (up to the greater of 5% or 120% of the federal mid-term rate). Payment is fixed.
• Fixed annuitization: the balance divided by an annuity factor from an IRS mortality table. Similar to amortization.

The modification rule is strict: once started, payments must continue unchanged until the later of five years after the first payment or age 59½. Changing the amount, adding money to the account or taking extra withdrawals is a “modification,” and the 10% penalty then applies to all prior payments, plus interest. The one allowed change is a one-time switch from either fixed method to the RMD method. Death or disability ends the plan without penalty.

Tips commonly mentioned: you can split an IRA first so only part of it is committed to SEPP, leaving the rest flexible. Consider getting professional help, as calculation errors are costly.

In scenarios, the app can schedule a 72(t) stream from a chosen account and holds it fixed for the required period.

Example

At age 50, you set up a SEPP on a $500,000 IRA. Your single life expectancy (IRS Single Life Table) is 36.2 years.

• RMD method: $500,000 ÷ 36.2 = $13,812 in year one
• Amortization at 5%: $500,000 × 0.05 ÷ (1 − 1.05^−36.2) ≈ $30,156 a year, fixed

Starting at 50, you must continue until 59½ (the five-year mark at 55 comes first). If you started at 57 instead, you would continue until 62, five years after the first payment.