How 72(t) payments work
Withdrawals from an IRA before 59½ usually owe a 10% additional tax. Section 72(t)(2)(A)(iv) waives it for a series of substantially equal periodic payments (SEPP) figured with an IRS-approved method. IRS Notice 2022-6 sets the rules.
RMD method: payment = balance ÷ life expectancy (refigured every year)
Fixed amortization: payment = balance × i ÷ (1 − (1 + i)−L), with L = life expectancy and i = interest rate
Interest rate ≤ the greater of 5% or 120% of the federal mid-term rate (either of the 2 months before payments start)
Fixed amortization: payment = balance × i ÷ (1 − (1 + i)−L), with L = life expectancy and i = interest rate
Interest rate ≤ the greater of 5% or 120% of the federal mid-term rate (either of the 2 months before payments start)
You may use the Single Life Table, the Uniform Lifetime Table, or the Joint and Last Survivor Table. The Single Life Table gives the shortest life expectancy and the largest payment; the Uniform Lifetime Table gives a smaller one.
Worked example (from the IRS)
Age 50, $400,000 balance, Single Life Table (36.2 years), 4% interest. RMD method: 400,000 ÷ 36.2 = $11,049.72. Fixed amortization: the amortization factor for 36.2 years at 4% is 18.9559, so 400,000 ÷ 18.9559 = $21,101.63. The IRS FAQ rounds these to $11,050 and $21,102.
The rules that can cost you
- Don't modify the payments until the later of 5 years after the first payment or age 59½. Start at 50 and you're locked in until 59½; start at 57 and it's until 62.
- A change counts as a modification: a different amount, extra withdrawals, adding money to the account, or moving part of it. The 10% additional tax then applies to every payment taken so far, plus interest.
- One change is allowed: switching once from a fixed method to the RMD method.
- Payments are still taxed as ordinary income. 72(t) only removes the 10% additional tax.
- You can take the yearly amount monthly, quarterly or once a year.
What this calculator leaves out
- Fixed annuitization method. Its annuity factor needs the mortality rates in 26 CFR 1.401(a)(9)-9(e), which we haven't embedded and checked line by line, so we don't calculate it. It usually gives a payment close to fixed amortization.
- Joint and Last Survivor Table. It depends on two ages, and isn't built in here.
- For a 401(k) or other employer plan, you must have separated from service first. Leaving at 55 or later may let you skip 72(t) altogether.
Sources
- IRS Notice 2022-6 – methods, tables, interest rate limit, one-time switch, Uniform Lifetime Table (Appendix A)
- IRS: FAQs on substantially equal periodic payments – worked example and modification rules
- 26 CFR 1.401(a)(9)-9 (Single Life Table) – Single Life Table
- IRS applicable federal rates (AFR) rulings – monthly federal mid-term rates (120% column)
- IRS Publication 590-B – 10% additional tax and its exceptions