A Guide to the 72(q)/72(t) Distribution Method

Mary Grace Paoletti, CPA, Financial Planner

When planning for retirement, tax-advantaged accounts are some of the most common tools that individuals utilize as a vehicle for achieving their long-term goals. This includes IRAs, 401(k)s, 403(b)s, and non-qualified annuities. Each of these accounts have their own unique benefits and limitations, but one thing they all have in common is that they require you to reach age 59 ½ before being able to take penalty-free distributions. However, Section 72(q)/72(t) of the tax code provides a distribution method that will allow you the flexibility to draw on those funds, penalty-free, before the age of 59 ½.

Green soccer field from above

72(q) applies to non-qualified annuities, while 72(t) applies to IRAs, 401(k)s, and 403(b)s. If you participate in any of these retirement accounts, code section 72 allows you to take penalty-free withdrawals as a series of substantially equal periodic payments (SoSEPP). To qualify as a SEPP payment, you must withdraw the same amount each year for the greater of 5 years or until you turn 59 ½. The amount you can withdraw each year is determined by one of the three approved calculation methods:

  1. Life Expectancy (RMD) Method.
    This is generally the simplest way of calculating the annual distribution amount. The IRS provides three life expectancy tables for the taxpayer to choose from: single, uniform, and joint life & last survivor. The single life expectancy table generally produces the largest annual distribution. It is important to note that the life expectancy table chosen for the first year of distribution will need to be the same table used in each subsequent year of distribution. The RMD method is the only method that will result in different payment amounts each year. This method will most likely result in the smallest initial payment, but it tends to be the best choice for taxpayers that expect their account values to fluctuate greatly in value.
  2. Fixed Amortization Method.
    Under the amortization method, the annual distribution is determined to be the amount that will result in the level amortization of the taxpayer’s account balance over a number of years, determined by their chosen life expectancy table. Once the taxpayer selects a table and an applicable interest rate, the resulting SEPP payment is divided by their life expectancy and the same SEPP amount will be distributed each year.  
  3. Fixed Annuitization Method.
    The annuitization method is the most complicated of the three methods. The taxpayer must determine their annuity factor using the mortality rate tables provided by the IRS and their selected interest rate and divide their account balance by that factor. The same amount will be distributed each year.

Once you have chosen your desired calculation method, it cannot be altered without triggering retroactive tax AND a 10% penalty on all withdrawn funds. 

If you decide to receive SEPPs under 72(q) or 72(t), be sure to keep the following rules in mind: 

  • Be sure to schedule annual payments. If a single payment is missed, you will be assessed a 10% penalty on all funds withdrawn up to that point.
  • Funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), cannot be withdrawn under SEPP if you are still working for that employer.

While SEPPs can be very useful in early retirement, they also come with several rules and requirements that can have devastating impacts on your long-term retirement strategy if not followed precisely. If you find yourself wondering whether the SEPP method would be beneficial to you, do not hesitate to reach out to our team of CFP® professionals at Howe & Rusling. We will work to ensure that you understand your options and help you choose the option that is best for you.

Tax codes are current as of the date published and are subject to change without prior notice. A professional designation, certification, degree, or license, membership in any professional organization, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that the client will experience a certain level of results if the investment professional or the investment professional’s firm is engaged, or continues to be engaged, to provide investment advisory services. No professional designation should be construed as an endorsement by any past or current client of the investment professional or the investment professional’s firm.

Mary Grace Graniero

Mary Grace is a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™, responsible for working with clients to achieve both short-term and long-term financial goals.


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