# Understanding the 72(t) Rule: Penalty-Free IRA Withdrawals Explained

![Rule of 72(t)](https://www.investopedia.com/thmb/GcXYI_E_hM8E1mnDeR1QOh5_K-8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/rule72t.asp-Final-fd4355e09b1049408af4b5f570d35f96.png)

*— Investopedia / Dennis Madamba*

## What Is Rule 72(t)?

Rule 72(t) allows penalty-free withdrawals from [individual retirement accounts (IRAs)](https://www.investopedia.com/terms/i/ira.asp) and other [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) retirement accounts like [401(k)s](https://www.investopedia.com/terms/1/401kplan.asp) and [403(b)](https://www.investopedia.com/terms/1/403bplan.asp) plans. It is issued by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp).

This rule lets you use retirement savings early without the usual 10% penalty. Withdrawals are still subject to your regular [income tax rate](https://www.investopedia.com/terms/t/taxbracket.asp).

Withdrawals according to Rule 72(t) must be spread out over five years, using one of three approved payment calculation methods. However, you should consider the risks of losing future compound gains on your savings.

### Key Takeaways

*   Rule 72(t) provides an option for penalty-free early withdrawals from retirement accounts like IRAs and 401(k)s. However, these withdrawals are still subject to regular income tax.  
    
*   Utilizing Rule 72(t) should be considered a last resort for financial relief, as it may significantly deplete one's retirement savings and jeopardize future financial stability.  
    
*   Account holders must adhere to a specific withdrawal schedule, making at least five substantially equal periodic payments (SEPPs), based on life expectancy calculations approved by the IRS.  
    
*   The three methods for calculating withdrawal amounts under Rule 72(t) are the amortization method, the minimum distribution method, and the annuitization method, each with different implications on withdrawal amounts.  
    
*   Although not advisable for most situations, Rule 72(t) can be a viable option for individuals who do not qualify for other exceptions and face urgent financial needs.

##  In-Depth Look at Rule 72(t) Exceptions

Rule 72(t) refers to code 72(t), section 2, which specifies exceptions to the [early-withdrawal tax](https://www.investopedia.com/terms/e/earlywithdrawal.asp). These exceptions let you withdraw from retirement accounts before age 59½ if certain conditions are met.

To use this rule, you must take at least five [substantially equal periodic payments](https://www.investopedia.com/terms/s/sepp.asp) (SEPPs). Payment amounts are based on your [life expectancy](https://www.investopedia.com/terms/l/lifeexpectancy.asp) as calculated through IRS-approved methods. You must follow a specific schedule for withdrawals. The IRS provides three methods to calculate your withdrawal schedule. You must follow the schedule for five years or until age 59½, whichever comes later, unless you're disabled or deceased.

## How to Calculate Withdrawal Amounts Under Rule 72(t)

Payments depend on life expectancy, calculated through one of three IRS-approved methods:

*   The amortization method
*   The minimum distribution or the life expectancy method
*   The annuitization method

The [amortization method](https://www.investopedia.com/terms/f/fixed-amortization-method.asp) determines yearly payment amounts by amortizing the balance of an investor’s account over single or joint life expectancy. This method develops the largest and most reasonable amount an individual can remove, and the amount is fixed annually.

The minimum distribution method takes a dividing factor from the IRS’s single or joint life expectancy table, using it to divide the retirement account’s balance. The key difference between this method and the amortization method is the resulting payments with the minimum distribution method, as the name implies, are the lowest possible amounts that can be withdrawn.

> **Fast Fact**
>
> The minimum distribution method is nearly the opposite of the amortization method, as the annual early withdrawal payments are likely to vary from year to year, though not substantially.

The final IRS-approved calculation is the annuitization method, which uses an [annuity factor method](https://www.investopedia.com/terms/a/annuity-factor-method.asp) provided by the IRS to determine equivalent or nearly equivalent payments in accordance with the SEPP regulation. This method offers account holders a fixed annual payout, with the amount typically falling somewhere between the highest and lowest amount the account owner can withdraw.  

## What Is the Downside of 72(t)?

Withdrawing money from a retirement account is a financial last resort. Using rule 72(t) will deplete your retirement savings, potentially putting the stability of your financial future in jeopardy.

## Is 72(t) a Good Idea?

For many situations, using rule 72(t) is not a good idea. The risk to your future retirement may be too great to justify taking money out now. In some rare cases, however, it may be worth it.

## What Is an Example of Withdrawing Money Early with Rule 72(t)?

As an example, assume a 53-year-old investor who has an IRA earning 1.5% annually with a balance of $250,000 wishes to withdraw money early under rule 72(t). Using the amortization method, they would receive approximately $10,042 in yearly payments. With the minimum distribution method, they would receive around $7,962 annually over a five-year period. Using the annuitization method, they would receive approximately $9,976 annually.

## Final Thoughts on Leveraging Rule 72(t)

Many retirement plans offer exceptions to the 10% penalty for certain circumstances, like disability and illness. If you do not meet any of the criteria for other exceptions, then rule 72(t) can be used if you have exhausted all other avenues. These withdrawals must be structured in five SEPPs.

However, Rule 72(t) should not be used as an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp), as any withdrawals could affect your future financial stability.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Substantially Equal Periodic Payments](https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments)."