Understanding 72(t) Distributions: How are They Taxed and How to Set Them Up

Retirement planning can be a complex process, with a myriad of rules and regulations to navigate. One such rule is the 72(t) distribution, a method that allows you to access your retirement funds early without incurring the usual penalties. However, understanding how to set up a 72(t) distribution and how it is taxed can be challenging. This blog post aims to demystify these aspects for you.

What is a 72(t) Distribution?

A 72(t) distribution refers to the Internal Revenue Service (IRS) rule that allows individuals under the age of 59½ years to withdraw money from their retirement accounts without incurring the typical 10% early withdrawal penalty. This rule applies to most types of retirement accounts, including traditional IRAs, 403(b), TSP and employer-sponsored plans like 401(k)s.

To qualify for this exception, you must commit to taking substantially equal periodic payments (SEPPs) over your life expectancy or the joint life expectancy of you and your beneficiary. The amount of these payments is determined by one of three calculation methods approved by the IRS.

How are 72(t) Distributions Taxed?

While the 72(t) distribution rule allows you to avoid early withdrawal penalties, it does not exempt you from taxes on those distributions. If your retirement account is tax-deferred—like a traditional IRA or a 401(k)—you will owe income tax on each distribution at your regular income tax rate.

For example, if you’re in the 22% tax bracket and take out $10,000 from your traditional IRA under Rule 72(t), you’ll owe $2,200 in taxes. It’s important to remember this when calculating how much money you’ll need each year because taxes can significantly reduce your net distribution.

How to Set Up a 72(t) Distribution

Setting up a 72(t) distribution requires careful planning and consideration. Here’s how to go about it:

1. Determine Your Need: Before setting up a 72(t) distribution plan, assess your financial situation to ensure that this is the best option for you. Remember that once you start these distributions, they must continue for at least five years or until you reach age 59½—whichever is longer.

2. Calculate Your SEPPs: The IRS provides three methods for calculating your SEPPs—the Required Minimum Distribution method, the Fixed Amortization method, and the Fixed Annuitization method. Each method will yield different payment amounts. Don’t forget to factor your life expectancy calculation. 

3. Begin Distributions: Once you’ve calculated your SEPPs and decided on a start date, contact your retirement account custodian to begin distributions. Confirm if your Custodian is 72(t)-friendly.  This can avoid unnecessary aggravation and keep you off the IRS’ mailing list. 

4. Pay Taxes: Remember that each distribution will likely be subject to income tax at your regular rate. The iRA Custodian can withhold taxes from each payment to you.  

5. Monitor Your Plan: It’s crucial to monitor your plan regularly and make sure it remains in compliance with IRS rules.


Understanding how to set up a 72(t) distribution and how it is taxed can help you make informed decisions about accessing your retirement funds early if desired or necessary. While this strategy can provide financial relief in certain situations, it also comes with risks—including potential tax liabilities and penalties if not correctly managed.

Therefore, before initiating a 72(t) distribution plan, consider consulting with a financial advisor experienced with this strategy or a competent tax professional to ensure that this strategy aligns with your overall retirement planning goals.