72(t) Substantially Equal Periodic Payments

If you need IRA money before age 59½ and a Roth conversion ladder is too slow, IRC §72(t)(2)(A)(iv) lets you take Substantially Equal Periodic Payments — a fixed annual amount calculated from your account balance that escapes the 10% early-withdrawal penalty. The price is rigidity: once started, the schedule cannot change for five years or until you reach 59½, whichever is later.

The three IRS methods

Notice 2022-6 specifies the three permitted calculation methods:

• Required Minimum Distribution method. Account balance divided each year by a life-expectancy factor. The payment recalculates annually — lower in down markets, higher in up.
• Fixed Amortization method. Amortize the balance over your life expectancy at an IRS-approved interest rate. Payment is fixed for the duration.
• Fixed Annuitization method. Divide the balance by an annuity factor at the IRS-approved rate. Payment is fixed.

The two fixed methods generally produce higher payments than the RMD method. Notice 2022-6 also reset the maximum interest rate to "any rate that is not more than the greater of 5% or 120% of the federal mid-term rate," which lifted SEPP payments significantly from prior guidance.

Worked example

A 50-year-old with a $1,200,000 IRA needs $50,000 a year. Using fixed amortization at 5% over a 36.2-year life expectancy: annual payment ~$71,400 for nine and a half years (until age 59½).

If $71,400 is too much, he can either (a) carve off a smaller piece of the IRA into a separate IRA and run the SEPP only on that piece, or (b) use the RMD method, which produces a lower payment (~$33,000 in year one) but recalculates annually.

The five-year / 59½ rule

The schedule must continue without modification until the later of:

• Five years from the date of the first distribution, or
• The IRA owner reaching age 59½.

For a participant starting at 50, the constraint is age 59½. For one starting at 57, the constraint is the five-year minimum, taking the schedule to age 62. Any "modification" — skipping a payment, taking a larger payment, adding to or rolling out of the SEPP account — retroactively triggers the 10% penalty on every distribution taken to that point, plus interest under IRC §72(t)(4).

The carve-out technique

Because SEPP payment size is fixed by account balance, it is common to split the IRA before starting. Roll, say, $400,000 of a $1,200,000 IRA into a new IRA and run the SEPP only on the $400,000 account. The remaining $800,000 stays untouched and is available for other purposes (Roth conversions, emergencies) without breaking the SEPP. Each IRA is treated independently for §72(t) purposes — but a single SEPP plan cannot itself be modified.

One-time switch

Notice 2022-6 codifies a one-time switch from either fixed method to the RMD method without triggering the penalty. The reverse is not allowed. The switch is useful when a long bear market makes the fixed payment unsustainable.

Common mistakes

• Modifying within the window. The full 10% penalty plus interest applies to all prior distributions if the schedule breaks. The most expensive mistake in the SEPP regime.
• Rolling into the SEPP account. Adding money to an account under an active SEPP is itself a modification under Rev. Rul. 2002-62 and Notice 2022-6.
• Comparing only to the Roth ladder. A Roth conversion ladder requires five years of bridge savings; the SEPP works immediately. For an unexpected early retirement, the SEPP is the only fast option.
• Forgetting state tax. The 10% early-withdrawal penalty is federal only — but several states impose their own additional tax on early withdrawals (California adds 2.5%). Check your state.

Sources

• Internal Revenue Code §72(t), early-distribution tax and exceptions (Cornell LII): law.cornell.edu/uscode/text/26/72
• IRS Notice 2022-6, SEPP methods and updated interest rate: irs.gov/pub/irs-drop/n-22-06.pdf
• Revenue Ruling 2002-62, original SEPP methods (still partially in force): irs.gov/pub/irs-drop/rr-02-62.pdf
• IRS Publication 590-B, Distributions from IRAs: irs.gov/forms-pubs/about-publication-590-b
• IRS, "FAQs regarding Substantially Equal Periodic Payments": irs.gov/retirement-plans/substantially-equal-periodic-payments

If you need pre-59½ cash flow, RetirementCheck101 compares the SEPP and the Roth ladder side by side. Explore the free educational tool.