The 72(t) Penalty-Free Distribution From Retirement Accounts – How Does It Apply To You?

A few months ago, I published an article about a fascinating and useful concept that I have been able to successfully implement this year – The Three Legged Stool for Retirement.

The crux of this whole concept is that we should aim to have built up (by the time of retirement) an approximately equal amount of savings in three different types of accounts (legs) – tax free (Roth-type accounts), taxable (regular accounts), and tax-deferred (401k/traditional IRA accounts). There are two main reasons to have a variety of accounts vs. just one:

  • Advantage #1 of The Three Legged Stool – It allows you to adjust/tweak your income sources during retirement so that you can get yourself in the lowest tax bracket possible.
  • Advantage #2 of The Three Legged Stool – On the road to retirement, having a mixture of account-types enables you to have money at hand (without penalty and minimal income tax burden) if the need were to arise.

The idea behind today’s post relates to the 2nd advantage above. More specifically, it relates to the fact that with most all retirement accounts (IRA’s and 401(k)’s), you generally have to pay a 10% penalty to access your money before the age of 59.5. For exceptions to this general rule and all the gory details on withdrawal rules, check out my previous post on the different retirement account options.

Thanks to a reader comment in the Three Legged Stool post, the idea was brought up that you could actually get around this 10% penalty on early withdrawals by using something called the 72(t) rule.

The goal for this post will be to examine briefly what the 72(t) rule is (because it is no doubt defined well by other writers previously) and how I think it should affect us as savers for retirement trying to establish our Three Legged Stool. Let’s get started!


What is the 72(t) Distribution Rule?

As eluded to above, the 72(t) distribution rule allows a person to withdraw funds from a retirement account (401(k), IRA, annuity, etc) before the age of 59.5 while avoiding the normal 10% penalty that applies.

The rule dictates that in order to qualify for this exemption, you must take [Substantially] Equal Periodic Payments (SEPP’s) at least annually in such a way that the entire balance of your retirement account is depleted over your remaining life expectancy. While there are many other fine details to be aware of, I will stick to the brief description here and refer you to some great resources I found below:


Questions Applying The 72(t) Rule To Real Life

Having read through the articles above, there are three primary questions I would have if I was personally going to employ the 72(t) in my life. In order to help others that may also have similar questions, I’ll discuss the answers to these below. Luckily, the remedies all seem pretty straight-forward and available.


Question #1 – Is it possible to use the 72(t) exemption rule if you only want to withdraw a small amount of money from your retirement account (not the entire balance as the rule states)?

Although the 72(t) rule does indeed state that you must take the equal periodic payments in such a way that the ENTIRE retirement account balance is depleted over your remaining life, there is a fairly easy fix to get around this by using or opening up multiple retirement accounts. 

As WealthPilgrim explains, you can choose to only apply the 72(t) distributions to one of your retirement accounts (not all of them).

What this means is that if, for example, you only want to withdraw $10,000 of the $100,000 you have saved in your Vanguard IRA, you can achieve this by rolling over the $90,000 you want to keep saving in to an existing or new IRA (has to be prior to starting the equal periodic distributions) and then execute the 72(t) distribution to deplete the entire remaining $10,000 balance in your first IRA.


Question # 2 – Do you have to be officially “retired” or “separated from service” to qualify for the 72(t) distribution rule?

In short, the answer to this question is Yes and No. Here’s why:


Question # 3 – Can you still contribute to a retirement account after/while taking 72(t) distributions?

Thanks to the feature discussed in Question #1 about being able to elect to use 72(t) distribution on only select (not all of your) retirement accounts, there is a fix for this as well.

  • According to, if you’re taking 72(t) withdrawals from one retirement account, you can not make any more contributions to that same account in order to still be exempt from the 10% penalty.
  • However, you can still contribute to A SEPARATE RETIREMENT ACCOUNT at the same time you are taking 72(t) withdrawals from the 1st account.
  • So, simply open up a new IRA to contribute to or contribute to a separate existing IRA.


Conclusion / How This Applies to My Three Legged Stool for Retirement

To sum up the 72(t) distribution rule, I will conclude that it falls in the category of “a nice, workable feature to know about in an emergency/unexpected situation to access retirement money, but not something that is likely to affect my long-term financial planning.”

The reason for this is two fold:

  • First, while the 72(t) distribution is nice in letting you avoid the 10% early withdrawal penalty, it does not shield you whatsoever from the more potent 25-45% tax burden that you’ll have to pay for accessing the retirement money early (with the exception of Roth and annuity contributions).
  • Second, and more importantly, the 72(t) rule doesn’t help you at all during retirement at managing your income tax bracket by taking income from different types of accounts.

How about you all? Have you ever done a 72(t) distribution from a retirement account or know anyone that has? Did the process go smoothly, or did something unexpected come up?

Does the 72(t) rule affect your long-term financial planning process?

Share your experiences by commenting below! 

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About the Author Jacob A Irwin

Hi folks! My name is Jacob. I am the owner and operator of My Personal Finance Journey. I started this blog in January of 2010 and have enjoyed the journey ever since. Since finishing up graduate school in Virginia in 2014, I have been working in biopharmaceutical development in Colorado. You can read more about me and this site here​. Please contact me if you have any questions!

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Leave a Comment:

MITM says November 27, 2013

Very interesting. Just another tool in our retirement planning toolbox! 🙂

John says April 29, 2014

Your article implies that “the 72(t) Rule” is only Substantially Equal Periodic Payments, and that is the only way to avoid the 10% excise tax on distributions taken before age 59 1/2.

There are actually MANY exceptions to the excise tax under IRC 72(t), and all of the other exceptions should be explored first, as they generally make more sense than SEPPs.

Here is a partial list of other 72(t) exceptions: education expenses, first time home purchases, disability, medical expenses (exceeding 7.5% of AGI), age 55 and separating from service (401(k)s only), QDRO’s, certain distributions to military reservists called to active duty, IRS levy, etc …

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