February 9, 2022

IRA Withdrawal Exemptions and Rule §72(t)

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Do you need money from an IRA and have not reached age 59 ½? Are you hesitant to withdraw your money now because the IRS may charge you an early withdrawal penalty? At Frost Law we can help you understand the exceptions to the penalties for early withdrawals, including under Internal Revenue Code (IRC) §72(t) and the substantially equal periodic payment (SEPP) program.

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Brief Overview of IRC §72(t)

Qualified retirement plans include 401(K), 403(b), 457(b), thrift savings plans, and IRAs.Generally, early distributions from qualified plans incur an additional penalty equal to 10% of the amount of the early distribution that is includible in gross income.¹ Early distributions are those made to participants who have not yet reached age 59 ½. However, notable exceptions permit some individuals to avoid this  “10% penalty.” 

Sometimes circumstances in life, particularly hardship scenarios, force individuals to make early withdrawals. Some examples of circumstances which may result in exemption from the 10% penalty include permanent disability, death, medical bills exceeding 10% of your adjusted gross income (AGI), and a first-time home purchase.² But even outside of scenarios like these, there remains an important exemption from the 10% penalty if individuals are taking early withdrawals under a qualifying SEPP program.³

SEPPs Explained

Early withdrawals may avoid the 10% penalty if the payments are made from an IRA (and not your current or former employer’s qualified retirement plan) and as part of SEPPs. The payments under SEPPs are based upon your life expectancy (or the joint life expectancies of you and your designated beneficiary) and, until recently, typically used an assumed IRS interest rate (which was 1.6% for February, 2022).  

New IRS guidance for determining the interest rate makes SEPPs even more appealing–now, long periods of low interest rates no longer affect the calculation as negatively.⁴ Under the new rule, the assumed interest rate (the amount which is assumed that the IRA will earn) is the greater of (a) up to 5%, or (ii) up to 120% of mid-term AFR. Ultimately, this makes it easier to qualify and have a greater income stream.  

Moreover, the payments under a SEPP must continue for a period equal to the greater of 5 years or the year you turn 59 ½.  In other words, if you start a SEPP at age 25, you must continue taking these payments until you turn 59 ½; however, if you start a SEPP when you are 56, your payments must continue until you are 61.  Remember, the general rule is that withdrawals from an IRA (or other qualified plan) after reaching age 59 ½ do not incur any penalties (just income taxes).

Significantly, payments will only be considered SEPPs if they are calculated in accordance with one of the following three IRS-approved methods:

  1. Fixed Amortization Method. Here, annual payments are the same for each year of the program. Typically, under this method, the payment is determined based on the participant’s life expectancy (derived from IRS-approved life expectancy tables) and now an interest rate of not more than the greater of (a) 5%, or (ii) 120% of mid-term AFR. The annual amount determined for the first year’s distribution is then used each year thereafter—no need for annual distribution amount recalculations.
  1. Fixed Annuitization Method. Under this method, the annual payment is calculated by dividing the participant’s retirement account balance by an annuity factor. The annuity factor (derived using an approved mortality table and the new interest calculation) is equal to the present value of an annuity of $1 per year starting at the participant’s age in the year of the first payment and continuing throughout the participant’s lifetime. As with the Fixed Amortization Method, then, the annual amount remains the same under this Fixed Annuitization Method.
  1. Required Minimum Distribution (RMD) Method. Generally, calculation of the annual payment under the RMD requires dividing the current account balance by the participant’s life expectancy factor. Annual payments must be recalculated each year reflecting the new balance. And whichever IRS-approved life expectancy table is used initially, must be used each year thereafter.⁵ Although the payments will vary under this method, they are still considered substantially equal and valid SEPPs.⁶

From a planning perspective, it is crucial to remember that short-term financial needs are usually not suited to SEPP programs. Instead, many times a SEPP program is combined with a rollover IRA for a surviving spouse to provide the necessary income stream until the surviving spouse reaches 59 ½.  Again, as stated above, once SEPPs begin, they must continue for at least 5 years or until the participant is 59 ½ years old (whichever occurs later).⁷


SEPP programs are complex but may be worth considering in certain financial emergencies and with guidance from an experienced tax professional.  Mistakes can be costly, triggering the 10% penalty (along with interest on the deferred penalties from earlier tax years). An experienced tax and financial planning professional is best suited to help you evaluate your options and prevent costly mistakes. 

Our team can help you navigate the rules regarding distributions from qualified retirement plans and inherited IRAs, contact us at (410) 497-5947 or schedule a confidential consultation with our brief contact form


  1. IRC §72(t).
  2. Note that it is the taxpayer’s burden to establish entitlement to a statutory exemption to IRC §72(t)(2). See Pulliam v. Commissioner, T.C. Memo 1996-354.
  3. IRC §72(t)(2)(A)(iv).
  4. Notice 2022-6.
  5. Id.
  6. For a more comprehensive look at these methods, see Rev. Rul. 2002-62.
  7. See “Retirement Plans FAQs regarding Substantially Equal Periodic Payments” at https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments#2.
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