72(t) SEPP Payment Calculator
Estimated Annual Distributions
Life Expectancy Method:
$0.00
Fixed Amortization Method:
$0.00
Fixed Annuitization Method:
$0.00
*Calculations based on Single Life Expectancy Table (IRS Publication 590-B).
What is a 72(t) Distribution?
A 72(t) distribution, officially known as Substantially Equal Periodic Payments (SEPP), allows you to withdraw funds from your IRA or 401(k) before age 59½ without paying the standard 10% early withdrawal penalty. While you will still owe regular income tax on the distributions, the penalty is waived as long as you adhere strictly to the IRS rules.
Critical Rule: Once you begin 72(t) payments, you must continue them for at least five years or until you reach age 59½, whichever is longer. If you modify the payments or stop them before this period ends, the IRS will retroactively apply the 10% penalty to all previous distributions, plus interest.
The Three IRS-Approved Calculation Methods
The IRS provides three distinct ways to calculate your annual distribution amount. This 72t calculator provides estimates for all three:
- Life Expectancy Method: This is the simplest method. The payment is recalculated each year by dividing your account balance by your current life expectancy factor. Payments usually start lower but can fluctuate based on account performance.
- Fixed Amortization Method: This method results in a fixed annual payment. It is calculated using your life expectancy and the chosen interest rate (capped by the IRS). It generally results in a higher payment than the life expectancy method.
- Fixed Annuitization Method: This uses an annuity factor provided by the IRS to determine a fixed annual payment. This often provides the highest possible payout among the three options.
Choosing the Right Interest Rate
For SEPP plans, the IRS limits the interest rate you can use. You are permitted to use an interest rate that is not more than 120% of the federal mid-term rate, or a flat 5%, whichever is higher. Using a higher interest rate generally increases the amount of your annual distribution.
Example Scenario
Imagine a 45-year-old with $500,000 in an IRA. Using an IRS interest rate of 4.5%, the Fixed Amortization method might yield approximately $25,000 per year. They must take this exact amount annually until they turn 59½. If they were 57, they would still have to take the payments for a full 5 years (until age 62), even though they pass the 59½ threshold during that time.