The 72(t) SEPP rule lets you pull money from an IRA or similar retirement account before age 59½ without the usual 10% early withdrawal penalty, provided you take the money as substantially equal periodic payments calculated by an IRS-approved formula and keep those payments going, unchanged, for the longer of five years or until you reach 59½. The waiver covers only the 10% surcharge. You still owe ordinary income tax on every dollar.
Which Accounts Qualify
The exception applies to traditional IRAs, 401(k) plans, 403(a) annuity plans, 403(b) tax-sheltered annuities, and similar qualified plans defined in Section 4974(c) of the tax code.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
One distinction matters at the start. If you’re pulling from an employer plan like a 401(k) or 403(b), you must have separated from service with that employer before your SEPP payments begin. IRA owners face no such requirement and can start distributions while still working.2Internal Revenue Service. Substantially Equal Periodic Payments
Each SEPP plan applies to one account only. You cannot combine balances from multiple IRAs into a single calculation, and each SEPP distribution must come from the account it was calculated on. If you want to tap two accounts, you run two independent SEPPs.
The Three Approved Calculation Methods
The IRS recognizes exactly three formulas for computing your annual payment. All three are spelled out in Notice 2022-6, which updated earlier guidance from Revenue Ruling 2002-62.3Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments Each uses an account balance and a life expectancy or mortality figure, but they produce different amounts and behave differently over the life of the plan.
The required minimum distribution (RMD) method divides your account balance by a life expectancy factor from an IRS table. You recalculate every year with the updated balance and a new factor, so the annual payment fluctuates. This method typically produces the smallest distribution.
The fixed amortization method calculates a level payment that would fully amortize your balance over your life expectancy at a permitted interest rate. Once set in the first year, the dollar amount stays the same. The interest rate component generally makes it pay more than the RMD method.
The fixed annuitization method divides your balance by an annuity factor built from a mortality table and a permitted interest rate. The result is locked in after the first year, and the amounts from this and the amortization method tend to run close.
Your life expectancy factor comes from one of three IRS tables in Publication 590-B: the Uniform Lifetime Table (the default for most people), the Single Life Expectancy Table, or the Joint Life and Last Survivor Expectancy Table, which applies when your sole beneficiary is a spouse more than 10 years younger.4Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
The Interest Rate Ceiling
Both fixed methods require you to pick an interest rate. Under Notice 2022-6, that rate cannot exceed the greater of 5% or 120% of the federal mid-term rate published for either of the two months before your first payment.2Internal Revenue Service. Substantially Equal Periodic Payments As of early 2026, 120% of the federal mid-term rate sits around 4.57%, below the 5% floor, so 5% is effectively the maximum most people can use. A higher rate produces a larger annual payment; a lower rate stretches the account further.
The One-Time Method Switch
If you start with the fixed amortization or fixed annuitization method and later find the payments are draining the account too fast, you’re allowed one irrevocable switch to the RMD method. This is the only mid-plan change the IRS permits without treating it as a modification.3Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments Once you switch, you must use the RMD method for every remaining year. You cannot switch back, and you cannot switch from RMD into a fixed method.
How Long Payments Must Continue
Your SEPP must run for the longer of five full years from the date of your first payment, or until you reach age 59½.2Internal Revenue Service. Substantially Equal Periodic Payments For most people starting in their 40s or early 50s, the age-59½ deadline is what binds. Start at 50, and you’re locked in for roughly nine and a half years. Start at 57, and the five-year rule takes over, running you to about 62.
During that entire window, you cannot add money to the account, take extra distributions, roll funds in, or skip a payment.
What a Modification Costs
Modifying your SEPP before the required period ends triggers a recapture tax. The IRS goes back and imposes the 10% penalty on every distribution you received since the plan began, plus interest calculated from each year the penalty was originally deferred.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts If you’ve been receiving payments for several years, the combined bill can be steep.
Three narrow exceptions exist. The recapture tax does not apply if the modification happens because of your death, a qualifying disability, or a distribution to a qualified public safety officer under Section 72(t)(10). And if your account simply runs out of money because you followed the formula correctly, the IRS does not treat the final reduced payment and cessation of future payments as a modification either.3Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments
This is where most SEPP plans fall apart in practice. Someone rolls a small amount into the account by accident, or takes an extra distribution for an emergency, and ends up owing years of back penalties with compounding interest. The one-time switch to the RMD method is a safety valve. Beyond that, there is almost no room for error.
Income Tax Still Applies
The SEPP exception waives only the 10% additional tax on early distributions. The money you withdraw is still included in your gross income for the year and taxed at ordinary rates.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts If your payments are large enough, they can push you into a higher bracket, so it’s worth modeling the income impact before locking in a method and interest rate.
Most states that impose an income tax will also tax SEPP distributions as ordinary income. States with no income tax or no tax on retirement income won’t add anything. Whether a state imposes its own early withdrawal penalty varies, but most follow the federal exception for substantially equal periodic payments.
Reporting the Distributions
Your account custodian issues Form 1099-R at year end documenting the total distributed. For a qualifying SEPP, the custodian should use distribution code 2 in box 7, which signals to the IRS that the early distribution qualifies for a penalty exception. Not all custodians handle this automatically, so verify the code before you file.
On your return, you report the distribution as income and file Form 5329 to formally claim the exception. The exception number is 02, for substantially equal periodic payments.5Internal Revenue Service. 2025 Instructions for Form 5329 Even when the 1099-R is coded correctly, filing Form 5329 makes your claim explicit and creates a paper trail. Keep your original calculation worksheet, the account balance statement from your valuation date, and the interest rate documentation. If the IRS questions your distributions years later, those records are the proof that every payment followed the formula from day one.