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72(T) Don'ts Thumbnail

72(T) Don'ts

The 72(t) rules can provide aid to someone needing to get extra funding before 591/2, but there are rules that must be followed or there are penalties.

While 72(t) might seem like a free offer for early retirement funds, they must be drawn carefully and adhering to the rules.


The 72(t) rules (”series of substantially equal periodic payments”) allow a person to tap retirement dollars before 59½ without a 10% early distribution penalty. However, to gain this early access, you must commit to a plan of withdrawals according to the strict guidelines set forth in the Tax Code. For example, some basic requirements dictate that:

  • 72(t) payments can begin from an IRA at any age, even if you are still working.
  • 72(t) payments from a company retirement plan are permitted only if the person has terminated employment with that company.
  • Must continue for at least five years or until age 59½, whichever period is longer.
  • Must be distributed at least annually.

If you get sideways with the rules, a 10% penalty will apply retroactively to all distributions taken before age 59 ½, sometimes referred to as the “recapture penalty.” To avoid this retroactive penalty, here are a handful of important “72(t) Don’ts” to consider:

Don’t roll new money into the IRA account with the 72(t), and don’t make any contributions to that IRA. Both actions will be deemed as a modification of the account and will trigger the recapture penalty. Think of the IRA with the 72(t) as a fragile antique bowl filled to the rim with a volatile and explosive liquid. Those who start a 72(t) must carry this delicate bowl with them until the 72(t) term expires. Handle it with extreme caution!

Don’t think you can withdraw more than what the 72(t) payment structure allows. Sure, the IRS would get their taxes quicker if you took larger distribution, but this is a deviation from the 72(t) term and will be a modification.

Don’t handcuff all your IRA money. If the desired annual payout can be achieved with a lower starting IRA value, it is highly recommended that you split the IRA. The strict 72(t) rules (the “handcuffs”) will only apply to the IRA being annuitized. The IRA without the 72(t) can still be used for contributions, Roth conversions, rollovers, additional withdrawals, etc.

Don’t alter the payment formula – stick to the script. While there is a one-time change allowed from the amortization and annuitization methods to the RMD method, be careful. Do not slosh the volatile 72(t) liquid around too much in the antique bowl.

Don’t stop the payments. Unless you die or become disabled, stopping the payments is a modification and will activate the recapture penalty.

Don’t shortchange yourself with a low interest rate. The IRS recently permitted the use of 5% for new 72(t) calculations if applicable rates are lower. However, in a rising interest rate environment, it is imperative to be aware of current rates so as to maximize new 72(t) schedules.

Don’t get loose with the 72(t) rules. Carry that fragile bowl carefully. Do not spill a drop of the volatile liquid. Any misstep or modification will trigger the recapture penalty…and the 72(t) will explode.

By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC

Copyright © 2022, Ed Slott and Company, LLC Reprinted from The Slott Report, 06/20/22, with permission. https://www.irahelp.com/slottreport/72t-don%E2%80%99ts, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Chris Cordoba, founder of California Retirement Advisors, is a member of Ed Slott's Master Elite IRA Advisor Group. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.