Using a 72t Distribution to Get Early Access to My Retirement Savings

72t distributionIf you’ve ever felt completely stumped by the challenge of the age 59-1/2 requirement when it comes to taking money out of your retirement savings, don’t!  There is a way to pull this off without paying a penalty.

This topic came up in the comments of my re-do post about retirement income strategies.  Fortunately one of the readers (thanks again Lucas!) brought up the little known strategy of using a 72t distribution to gain access to your money if you plan to take an early retirement (like I do).


What is a 72t Distribution?

In case you’ve never heard of this before, a 72t distribution (or 72t for short) refers to a section of the IRS tax code that allows savers the privilege of accessing their money without penalty through a method called substantially equal periodic payments (also called SEPP).

The way it works is like this:

  • You pick a distribution based on one of three methods: Required Minimum Distribution, Fixed Amortization Method, or the Fixed Annuitization Method.  Basically each one will yield you a different amount of distribution.  You can read more about the details here or try out this calculator here to see how the numbers will be different.
  • Once they start, you have to keep taking the withdrawals until you turn age 59-1/2 or 5 years, whichever is longer.
  • Ordinary income taxes are paid on the distributions.

Like I said – this is fantastic if you plan to retire early and need to gain access to your funds.  But it could also be dangerous for the longevity of your retirement savings if you take out too much or your investments don’t perform very well.  Plus there are some other aspects of the process that could botch the whole process if not properly executed.

So who better to tell me exactly how I can pull this off without making a mess of things?  How about the folks that are holding my money – the investment companies!


A Helpful Phone Call with Vanguard:

I decided to call Vanguard (where I have my IRA’s) and see what they had to say about the possibility of taking a 72t distribution.  Here is what they had to say:

Let’s say in 10 years I decide to leave my job.  If I want to rollover my 401k into my Vanguard account, is there a fee for that?

No, there are no fees.  You’d just fill out a form and convert it to a Traditional or Roth rollover IRA.  If you pick the traditional, than there won’t be any taxes.  If you pick the Roth, then there would be taxes owed on the balance, and you’d have to pay them out of pocket for that year on your income taxes.

(Just to be sure, I also called my 401k provider and checked to see if they had any outgoing fees for moving my savings.  It turns out they do: a onetime of $40.  I also found out that if I were to keep the money in my 401k but separate from my employer that a $25/year service fee would apply.  Go to know.)

Suppose I do the traditional IRA rollover and wanted to access a portion of this money using a 72t to receive SEPP’s.  How would I go about this?

I’d strongly urge you to talk to a tax professional about calculating one of the 3 payment options under a 72t distribution.  They will also be able to help you code your withdrawals when you file them on your income taxes.

You don’t have to fill out anything or notify Vanguard.  Vanguard doesn’t keep track of any of this for you.  You simply make an early withdrawal and then make sure you code it on your taxes correctly.

If I were to file for an SEPP, do you separate or partition a portion of my savings to cover these payments?

No.  There’s no setting aside money or locking it away someplace safe.  Your distributions simply come out of your normal investment account.

I currently have a Roth IRA with you guys.  Suppose in 10 years I wanted to make some early withdrawals.  Would I have to pay taxes and penalties?

You can withdraw the contributions anytime without penalty or taxes (since you’ve already paid taxes on this money when you invested it).

The earnings are different.  If you just plan to use the money for regular expenses, then you will have to pay ordinary income taxes and the 10% penalty.

When you make your withdraws, your contributions come out first.  Then come the earnings.

To avoid that 10% penalty, you could also use the 72t distribution to access it penalty free.


Why an IRA Rollover?  Why Not Just Take an SEPP from My 401k?

Now you might be asking yourself why go through all this trouble with rolling over the 401k into an IRA?  Can’t you just leave the money in your 401k and take a SEPP’s from that?

Well – I could.  But I’m not sure if I want to.

I called my 401k provider to see if taking SEPP’s would be an option after I separate from my employer.  He said that it was NOT.

I thought that sounded wrong, and so I did a little research.  It turns out on the IRS website here and here that 401k plans do permit SEPP’s.   Coincidently 403b plans also allow SEPP’s too.  So what’s the right answer?

Perhaps there’s something else in my employer plan I don’t know about.   Or perhaps the guy I was talking to didn’t know his stuff.

Regardless of the right answer, I do know that Vanguard charges much less in expenses than my 401k provider.  Suppose my account balance at the time of retirement is $1M.  Instead of paying 0.5 to 1.0% in expenses ($5,000 to $10,000), I could go with a lower rate of 0.05% to 0.3% ($500 to $3,000).

So for the time being, it looks like the route I have the most confidence in is the 401k -> Rollover IRA -> 72t distribution path.

72t Distribution

Readers – Does anyone out there have any actual experience with 72t’s or SEPP’s?  Did you find the process complicated or easier than people are making it sound?


Related Posts:

1) Your Plan for How to Become Financially Independent

2) How Do You Compare to the Average Retirement Savings of Other Americans?

3) There Are No Shortcuts to Early Retirement Planning

Images courtesy of


  1. Lucas says

    Good summary and good idea with giving Vanguard a call on this one :-)

    Yeah, i haven’t gotten a firm answer on the 401k SEPP question either. Several sources have stated that 72T withdraws can’t occur for QRP (qualified retirement plans) which include 401ks unless you are separated from service ( Your 401k provider might have to “support” them as well, but it seems like there would be little incentive for them to do that. If you are separated from service you might as well roll over to a IRA anyway to get full selection of funds.

    There looks like there is an additional exception for money out of a 401k between 55-59 1/2 if you “retire”

    So maybe this would be one reason to leave it in a 401k if you are over 55.

    Most of the SEPP calculations pretty much guarantee that you won’t run out of money in your accounts as they are life expectancy based. However if you are drawing down your IRA to quickly or want to reduce your SEPP payments you can do so one time ( by switching to the RMD calculation method (which is usually about 50% less then the other two). From what i have seen on the calculations you can get about 3.8% of total funds out a year with the Amortization method (around age 40), where as the RMD method would take around 2.2%

    • says

      Thanks again for renewing my interest in this method. I’m glad to see how viable this option is as part of my overall strategy. I’m actually satisfied with how low the effective withdrawal rates are across the 3 SEPP methods. I’d rather have some limit on how much you can withdraw as opposed to pulling out too much and sabotaging my life savings too quickly.

  2. Lucas says

    FYI – I also just saw a convincing argument for a ROTH conversion ladder ( that would also work if you have all your savings in a tax deferred account. Basically you can roll over any amount of money to a ROTH and if you keep this amount low each year you get the same almost 0% tax treatment.

    Couple advantages of this method:
    1) you have more control of the amount you “convert” each year
    2) if you convert but don’t use the money it is already in your ROTH
    3) if you don’t want to convert you don’t have to (SEPP forces the withdraw – but you can re-contribute back in if needed).

    Couple disadvantages
    1) The major disadvantage with this method is that converted funds to ROTH are subject to a 10% withdraw penalty if withdrawn within 5 years of the conversion. This means that you need 5 years of ROTH contributions (which would get withdrawn first) or taxable funds to hold you over while you build up the ROTH converted funds, or you need to start withdraws 5 years early (paying higher taxes at that point while you were still earning money).

    Either way it is great to have 2 options as it reduces risk of someone changing the tax code, and provides some additional flexibility depending on your exact situation when you get to that point.

    • says

      Very interesting! Thanks for that share. I will have to check this out in further detail. I love how creative some people get with these strategies.

        • says

          That’s interesting that you invest to invest money but not with a long term goal in mind. Obviously most people invest their money to get rich or build wealth into their older age.

          The interesting thing is that when planning for retirement, there are many tax advantages you will learn about that can save you significant sums of money – more than if you just tried to make all that money by picking the right stocks, etc. It’s definitely worth investing time into learning.

  3. says

    I’m sure it’s easy to take out money. That never seems to be a problem. The harder part would be making sure you report everything correctly to the IRS. I wonder how many people take out money and spend it without realizing the tax burden? I don’t plan on needing any retirement accounts before 59.5, but this is good information just in case.
    Kim recently posted..Pros and Cons of Being a CaregiverMy Profile

    • says

      The IRS reporting did seem like the complicated part. Vanguard was very clear that they don’t report any of this, so you are basically on your own (or with the help of an outside professional) to make sure you get it right, or else you’ll get in trouble with the Tax Man! I’m sure a lot of people make this mistake, and that’s probably why it’s not such a popular or well-known method.

      You’re very wise to set up your finances so that you don’t even need to worry about it.

  4. says

    Wonderful post — really nicely explained!

    Another alternative would be a Roth IRA conversion ladder as described here:

    The only negative is that you have to wait 5 years, so you’d have to have significant assets in your taxable accounts, but if you can pull it off it’s really great!
    Brad @ recently posted..Take Your Family to Disney World For Free: Step-by-Step InstructionsMy Profile

  5. says

    Looks like you are on the right path to successfully withdrawing your retirement savings before the traditional 59.5 years of age.

    And very smart to plan on transferring your expensive 401k to Vanguard. You’ll avoid annual account maintenance fees and slash your expenses.

    I just transferred $60,000 from my 401k to my IRA at Vanguard and went from a 0.21% expense ratio (my 401k’s cheapest option) to a similar large cap index fund at Vanguard at 0.05% expense ratio. I just saved $100 per year (0.16% of $60,000) in exchange for a 9 minute phone call to my old 401k sponsor. That’s a little higher than my hourly rate while working! ;)
    Justin @ RootofGood recently posted..Three Months of Early RetirementMy Profile

    • says

      Nice work! Vanguard’s prices are so low. I don’t think people really understand how large an impact those expense ratios can make; especially when you get up into the serious money range of six-figure balances.

  6. says

    Nice tip there! BTW, when you rollover 401K to an IRA, most 401K providers will charge you a fee. There is no fee from the newly created IRA account and some firms even will reimburse your fee if you ask.

    The process has to be done carefully to avoid penalties- it is called a custodian to custodian transfer – you shouldn’t get a check.
    Moneycone recently posted..How To Invest When You Have Very Little To InvestMy Profile

  7. Skip says

    The 72T program is a great way to get funds from your 401K early without the penalty. I will be 52 this year and I am thinking of retiring early at the end of this year. I will transfer my 401K with the US Government to a IRA at Vanguard. I will be able to pull out enough to pay my mortgage while my pension will pay the rest of my expenses. Then I will work part time doing stuff I want to do. Just so you know, they base the interest rate for the 72T by 120% of the Federal Mid-Term rate. This rule is pretty much set in concrete set by the IRS since 2003. The current rate (March 2014)is 2.21%. There are calculators to get a decent estimate based on your figures. Good luck to all who can do this. Life is too short to work a lifetime!!!!

    • says

      Don’t you love it when a plan comes together? I’m glad to hear you’ll be exercising this little-known option. I certainly plan to do the same thing as well and enjoy my time in the sun!

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