If you are using a 401(k) or an IRA to save for retirement, you may already know that you cannot access the money before age 59 ½ without paying a penalty. This 10% penalty is large enough to wipe away the benefits of tax-deferred growth for most savers and forces many to wait until they are at least 59 ½ to retire. So what do you do if you have saved enough for retirement but you are still under the age mark?

Utilize a 72(t) distribution

Also known as Substantially Equal Periodic Payments (SEPP), the 72(t) distribution allows you to access money from your Traditional Individual Retirement Account (IRA) without paying a 10% penalty tax for being under the age of 59 ½. This can make it possible to retire early without a hefty tax burden.

The distribution is calculated based on three things:

  1. The balance of the IRA
  2. The age of the account holder
  3. An IRS-issued interest rate

There are three IRS-approved methods to calculate the distribution amount and there are numerous 72(t) calculators out there to help you determine the amount you could distribute annually based on your account balance. Note that you must still pay regular income tax on the distribution since it is from your IRA.

What’s the catch?

There are a few drawbacks here if not appropriately planned for. The IRS requires that you continue the 72(t) distributions for 5 years or until you are 59 ½, whichever is longer.

This means that if you start the distributions at 58, you must be prepared to continue the exact distribution plan until you are 63. Alternatively, this means that you would have to continue the distributions for 10 years if you started them at age 49.

The second caveat is that you must take the calculated distribution, no more and no less. Even if you exceed the age of 59 ½ during the five-year timer, you will not be able to take an additional distribution in excess of the calculated 72(t) distribution until you complete the 5th year. Break any of these rules and you will pay all the backed penalty amounts.

Why would I want to do this?

The process is much more controllable than it seems. First, you can control exactly what the initial distribution amount is by controlling how much is in the Traditional IRA when you initiate the program. The 72(t) distribution does not follow IRA aggregation rules. This means you could put $200,000 into one IRA that does the 72(t) distribution and $200,000 into a different IRA that doesn’t do the 72(t) distribution. This gives you the ability to receive penalty-free distribution before 59 ½ from your 72(t) IRA while being able to take as much as you want from the other IRA once you are older than 59 ½.

You can also have multiple 72(t) distribution plans going at once. You are only limited to how many IRAs you have (which is essentially unlimited). This gives you flexibility in increasing or managing the distribution.

Lastly, you have the ability to take the distribution in a yearly lump sum or monthly. I generally recommend taking the distribution in a lump sum upfront in order to benefit from the favorable tax rates of capital gains and dividends in a taxable brokerage account.

Are there other ways to access my money earlier?

There is one other way to access your retirement funds without paying the 10% penalty tax. You may take penalty-free distributions from your employer-sponsored 401(k) plan if you leave your job between the age of 55 and 59 ½.

This opportunity does not have as many drawbacks as the 72(t) distribution and is generally better if your employer allows you to keep your 401(k) plan upon leaving the company. There is no required distribution amount or other limitations that would require a penalty recapture. The only rule is that you must leave the money inside the 401(k) plan. You are no longer eligible for this benefit if you roll your money into a Traditional IRA.


Accessing money before 59 ½ has rules, but that should not stop you from retiring when you want to. Taking the time to map out your distribution needs and determining the sources of those distributions can help you retire early and tax-efficiently.

Send us a message if you’re interested in discussing ways to retire early.