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Early Retirement Distributions: 72t and Rule of 55

by , | Updated: Feb 27, 2024 | Published: May 31, 2023 | Insights

Early withdrawal 72t rule of 55 The Woodlands, TX

Early Retirement Distributions: 72t and Rule of 55

Comparing the IRS-sanctioned methods of withdrawal before reaching age 59 ½


Generally, the IRS has historically forced retirement savers to wait until age 59 ½ to start withdrawal of assets from their IRAs or employer-sponsored retirement accounts without penalty. These restrictions were baked into the laws that created these types of accounts to incentivize long-term retirement savings and generally deter withdrawals from these types of accounts during your working years.

However, with the excellent returns on investors’ portfolios over the last three decades, many individuals find themselves financially ready to retire in advance of the retirement age for distributions mandated by these laws – age 59.5.

What many investors do not know is that there are various rules that allow them to withdraw funds from their retirement accounts prior to 59 ½ without incurring any penalties. Some of these rules are for major life events or medical problems, but there are two that are clearly oriented towards individuals who wish to undertake early retirement.

Under the Internal Revenue Code Section 72(t), taxpayers are allowed to initiate what the IRS calls Substantially Equal Periodic Payments (SEPP) from these accounts annually starting at any age. Taxpayers who are 55 and older and have separated from service with their current employer are also allowed to take penalty-free distributions from their 401(k) plan prior to reaching age 59 ½ under what is known as the Rule of 55. Below we will break down each of these rules, how they work, and compare them to help you determine what method would be best for any specific situation.


72(t) Substantially Equal Periodic Payments

The 72(t) tax rule allows individuals to take penalty-free distributions from their qualified retirement accounts (IRAs, 401(k)’s, etc.) before reaching the age of 59½. Under this rule, participants must commit to withdrawing periodic payments for a minimum duration of five years or until they reach the age of 59½, whichever is longer.

Calculating the SEPP

Again, the key to avoiding a tax penalty on these distributions is for the IRS to deem them to be “Substantially Equal Periodic Payments”. To determine the amount of the SEPPs, individuals must choose one of the three IRS-approved methods: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, or the Fixed Annuitization method. Each method uses a different formula to calculate the amount of the 72(t) distributions, taking into account factors such as life expectancy, account balance, and interest rates.

Required Minimum Distribution (RMD) method: This method uses the IRS’s Uniform Lifetime Table to calculate annual distributions based on life expectancy and the account balance. The RMD method often yields the lowest annual payout.

Fixed Amortization method: This method calculates equal annual payments based on the account balance, life expectancy, and an assumed interest rate. The payment amounts remain fixed throughout the duration of the SEPPs.

Fixed Annuitization method: This method determines annual distributions based on the account balance, life expectancy, and an assumed interest rate. However, instead of fixed payments, this method uses an annuity factor to calculate variable payments, which can result in larger annual distributions compared to the Fixed Amortization method.

Important Considerations

While the 72(t) tax rule provides a means of accessing retirement funds without penalty, it is essential to understand its limitations and potential 72(t) pitfalls:

Early Withdrawals: Once the SEPPs commence, individuals must continue taking the calculated payments for the predetermined period, regardless of their financial circumstances. Discontinuation of payments before the minimum duration has elapsed can result in retroactive penalties for the entire period. It is possible to modify the calculation method if the distribution needs change during the distribution period, however.

Taxation: While the 72(t) tax rule waives the early withdrawal penalty, distributions taken under SEPPs are still subject to ordinary income tax. It’s crucial for investors to consult a financial and tax professional to understand the tax implications and potential effects of these distributions on their financial plan.

Impact on Retirement Savings: Withdrawing funds from retirement accounts earlier than planned can significantly impact long-term savings goals. It’s essential to carefully consider the potential consequences and evaluate alternative options before implementing the 72(t) tax rule.

Please view our Rule 72(t) Calculator to discover your eligible annual 72(t) distribution amount.


Rule of 55

The rule of 55 is an IRS provision that allows workers who leave their job for any reason (voluntary, termination, etc.) to start taking penalty-free distributions from their most recent employer’s retirement plan upon reaching the age of 55.

In order to make these distributions, the company’s 401(k) plan must have a provision allowing these distributions – they are not obligated to do so. Some 401(k) plans allow for as many Rule of 55 distributions as the participant wishes to take, but others limit the number of annual distributions that are available. This rule also applies to 403(b) plans but does not apply to IRA accounts.

Important Considerations

Limitations on Eligibility: The rule of 55 applies only to retirement savings in the employer-sponsored plan associated with the employer from which the individual most recently separated. If an individual does go to a new employer at age 57, for example, the funds from the previous employer’s plan are still eligible for penalty-free withdrawals under the rule of 55. However, if the individual rolls those funds into the new employer plan, they are not eligible for rule of 55 until they separate from the new employer. This strategy is not available to individuals who leave their employer prior to attaining age 55.

Taxation: The rule of 55 might exempt a taxpayer from the early withdrawal penalty but the distribution taken will still be taxable in the year taken. Please be aware that there is a mandatory 20% tax withholding on rule of 55 distributions. If the individual’s effective tax rate is under 20% for the year, they would receive the excess withholding back as a tax refund upon filing their tax return.

Withdrawal Amounts: Unlike 72(t), the rule of 55 does not require a certain amount to be withdrawn every year. Under the rule of 55, any amount can be withdrawn at any time between age 55 and age 59 ½ if the requirements for the distribution are met.

Reduced Retirement Savings: As mentioned when discussing 72(t), withdrawing funds from a retirement account before reaching traditional retirement age can significantly impact the long-term growth potential of the account. It’s crucial to carefully evaluate financial needs and resources before tapping into retirement savings early.


Rule of 55 vs 72(t)

Age Requirement: The 72(t) rule requires individuals to commit to substantially equal periodic payments for at least five years or until they reach the age of 59½, whichever is longer. These payments can start at any age prior to reaching 59 ½. On the other hand, as the name implies, the Rule of 55 allows penalty-free withdrawals from employer-sponsored plans at age 55 or later with no continuation requirement.

Eligible Accounts: The 72(t) rule applies to all types of retirement accounts, including employer-sponsored plans and IRAs. In contrast, the Rule of 55 exclusively pertains to employer-sponsored retirement plans like 401(k)s and 403(b)s. It does not cover IRAs.

Flexibility: The Rule of 55 offers more flexibility as individuals can make one-time withdrawals or take periodic withdrawals as needed (subject to employer rules on the plan). This allows for greater control over the timing and amount of the withdrawals. Conversely, the 72(t) rule necessitates consistent, predetermined withdrawals for the entire duration of the commitment period. The only flexibility for 72(t) distributions is the ability to modify the calculation method used.

Withdrawal Calculation: Under the 72(t) rule, individuals have three IRS-approved methods to calculate the amount of their withdrawals. Conversely under the Rule of 55, individuals can withdraw any amount they choose from their employer-sponsored plan without the need for complex calculations.



Below are some frequently asked questions surround the Rule of 55 and 72(t).

How does one determine the exact amount of substantially equal periodic payments (SEPPs) under Rule 72(t)?

For Rule 72(t), determining the amount of substantially equal periodic payments (SEPPs) involves using one of three IRS-approved calculation methods: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, and the Fixed Annuitization method. Each method uses specific formulas to calculate the annual payments based on the account balance, the account holder’s age, and current interest rates.

The choice of method can significantly impact the payment amounts, and once initiated, the selected method must be followed for at least five years or until the account holder reaches age 59½, whichever is longer. It’s advisable to consult with a financial planner or tax advisor to determine the most beneficial calculation method for your specific situation.

Can you switch jobs and still use the Rule of 55 for early withdrawals?

Regarding the Rule of 55, it applies to individuals who leave their job in or after the year they turn 55, but it’s specific to the retirement plan of the most recent employer.

If you switch jobs after turning 55 and then decide to access your retirement funds, only the assets in the plan sponsored by the employer you left at or after 55 are eligible for penalty-free withdrawals under this rule. If you move to a new employer and contribute to a new plan, those assets would not be eligible under the Rule of 55 unless you leave that employer in or after the year you turn 55 as well.

What are the tax implications of using these rules for early retirement distributions?

The tax implications of using Rule 72(t) or the Rule of 55 for early retirement distributions primarily involve income taxes. While both rules allow for penalty-free withdrawals, the distributions are still subject to regular income taxation.

It’s crucial to plan for these tax obligations, as they can significantly impact your overall retirement strategy and financial health. The distributions do not escape taxation; instead, they are taxed as ordinary income in the year they are withdrawn. This aspect underscores the importance of carefully planning the timing and amount of distributions to manage the potential tax impact effectively.



Both the 72(t) rule and the rule of 55 allow taxpayers to get their hands on their retirement savings penalty-free prior to reaching age 59 ½. They each have different rules that govern them and, if executed incorrectly, can result in adverse consequences for the taxpayer. Investors should carefully consider how these rules work as well as their advantages and common pitfalls before deciding which option is best for them.

The Rule of 55 and 72(t) make 401(k)s even more attractive as a savings vehicle. Check out this article to learn more from our very own Kyle McClain, CFP®, CIMA® on the advantages of 401(k) accounts over other options.

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If you want to discuss your financial position with knowledgeable professionals who can help you identify and overcome ways to best maneuver volatile markets, please feel free to reach out to us here at Rhame & Gorrell Wealth Management for a complementary financial plan review.

Our CPA, CFA, and CERTIFIED FINANCIAL PLANNER (CFP®) professionals have years of experience and are happy to help answer any retirement questions you might have.

We can help you review your financial and tax situation and come up with a custom strategy going forward.

Feel free to contact us at (832) 789-1100, [email protected], or click the button below to ask a question or schedule your complimentary strategy session today.


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Tax Planning Manager
Clay grew up and went to high school in Roswell, Georgia. After High School, Clay attended Baylor University in Waco. While at Baylor, Clay was heavily involved with the local Waco youth through Young Life.

Clay graduated from Baylor with his Master's of Accounting in the winter of 2018. Clay took a job out of college with Deloitte working in the Multistate Tax Services group. While Clay loved the data analytics and research aspects of working at Deloitte, he realized that his skills were better used working with individuals directly. He took this passion and worked for a small Houston-based accounting firm, Cook, Johnston & Co. CPAs. At Cook, Johnston &Co., Clay worked on hundreds of individual and business tax returns. This included Income/Franchise tax, Payroll tax, and Sales tax returns. Working with his individual clients made Clay realize he would love to enter a career in financial services.

Clay has earned his Certified Public Accountant (CPA), Certified Financial Planner (CFP®), and Certified Investment Management Analyst (CIMA®) designations. He has also acquired his Personal Financial Specialist (PFS) designation.


Partner & Senior Wealth Manager
As a Wealth Manager, Kyle McClain serves on the Investment Committee, interfaces with clients, and coordinates ongoing financial planning initiatives. He also facilitates many marketing and business development functions for the firm.

Prior to joining RG Wealth, Kyle spent time with Fidelity Institutional Asset Management as an Investment Consultant and with Merrill Lynch as a Wealth Advisor. He graduated Magna Cum Laude with a dual degree in Finance and Economics from the University of Alabama. He also completed his CERTIFIED FINANCIAL PLANNER™ program at Texas A&M University, holds the CFP® designation, and has completed his Certified Investment Management Analyst (CIMA®) designation from the Yale School of Management.




Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

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