72(t) payments: using an IRA before 59½ without the penalty
How the rule works, the three IRS methods, and what to weigh first.
The short answer
Take money from an IRA before age 59½ and you usually pay income tax plus a 10% penalty. Rule 72(t) lets you skip the penalty.
The catch: you must take the same set payment on a schedule, for years. The IRS calls these “substantially equal periodic payments.”
How long you are locked in
Once you start, you must keep the payments going for 5 years or until you turn 59½. Whichever is later.
Changing the plan early is costly. Stop or change the payments too soon and the 10% penalty can come back on every payment you took, plus interest.
The three IRS methods
RMD method
Divide the balance by a life-expectancy number each year. The payment changes each year. It is usually the smallest payment. You may switch into this method once.
Fixed amortization method
Spread the balance over your life expectancy at an interest rate the IRS allows. The payment stays the same each year.
Fixed annuitization method
Divide the balance by a factor from IRS tables and an allowed interest rate. The payment also stays the same each year.
The IRS limits the interest rate you can use. The current rules are in IRS Notice 2022-6.
What to weigh first
- The schedule is fixed for years. Your needs may change.
- You can use 72(t) on one IRA and leave your other IRAs alone.
- Work plans have their own rules. If you left your job in or after the year you turned 55, you may already skip the penalty on that plan.
- Math mistakes are costly. Have the numbers checked before the first payment.
Talk it through with Onesta
Every family’s accounts, dates and taxes are different. Bring your questions and we will look at them together.
Or call (408) 786-0508.