Rule 72(t) SEPP: Calculation Methods, Inputs, and Busting the Plan

Rule 72(t) of the Internal Revenue Code lets you take money out of an IRA, 401(k), or similar retirement account before age 59½ without the usual 10% early-withdrawal penalty, provided you commit to a series of substantially equal periodic payments (SEPP). You pick one of three IRS-approved formulas, calculate an annual amount, and take that amount every year for at least five years or until you reach 59½, whichever comes later. Break the schedule and the IRS reaches back to your first payment, applies the 10% penalty to every distribution you took under the plan, and adds interest. IRS Notice 2022-6 is the controlling guidance for any SEPP that begins in 2023 or later.¹

Which Accounts and People Qualify

SEPP applies to most tax-advantaged retirement accounts. Traditional IRAs are the most common vehicle, but 401(k), 403(a), and 403(b) plans also qualify. The only age requirement is that you must be under 59½ when the first distribution is taken, because that is the age at which the 10% penalty stops applying anyway.²

IRAs and employer plans differ on one important point. To start a SEPP from a 401(k), 403(a), or 403(b), you must have separated from service with the employer that sponsors the plan. You cannot draw SEPP payments from a current employer’s plan while still working there. IRAs have no such restriction, which is why most people running a SEPP use an IRA, often after rolling over funds from a former employer’s plan.³

Payments must be made at least annually. You can take them monthly, quarterly, or in a single yearly installment, but the total that leaves the account each calendar year has to match the amount your chosen formula produces. Picking a round number, or varying the amount from one year to the next, disqualifies the whole series.

The Three Calculation Methods

Notice 2022-6 recognizes three formulas, and each produces a different dollar amount from the same starting balance.¹

Required Minimum Distribution Method

Divide the account balance by a life expectancy factor from an IRS table, and that quotient is the year’s payment. Both the balance and the factor are recalculated every year, so the payment fluctuates with the account. In a down market it shrinks; in an up market it grows. The RMD method almost always produces the smallest initial payout, but it has a built-in safeguard against draining the account too quickly.³

Fixed Amortization Method

This works like a mortgage in reverse. You amortize the account balance in level annual payments over a period set by a life expectancy table and a chosen interest rate. The calculation is done once at the start, and the dollar figure stays the same every year. It typically produces a higher payout than the RMD method and gives you a predictable income to budget against. The risk is that if investment returns fall short, the fixed withdrawals will drain the account faster than the schedule assumed.¹

Fixed Annuitization Method

You divide the account balance by an annuity factor built from an IRS mortality table and a chosen interest rate. The result is a level annual payment, locked in at inception. The annuitization figure is usually close to the amortization figure, since both use the same interest rate on the same balance, but the mortality table produces a slightly different factor. Both fixed methods give you the highest stable income the account will support.¹

Your choice of method is essentially permanent. The only allowed change is a one-time switch from either fixed method to the RMD method, covered further down.

The Inputs That Drive the Payment

All three methods need an account balance. The two fixed methods also need an interest rate and a life expectancy or mortality factor. An error in any input produces the wrong payment, and the IRS treats a wrong payment as a modification.

Account Balance

You need a specific date’s balance to plug into the formula. The IRS allows any “reasonable” valuation date. The prior year’s December 31 balance and the most recent month-end statement before distributions begin are both common choices. Pick a date, document it, and apply it consistently. The balance is used once for the fixed methods and recalculated annually for the RMD method.³

Interest Rate

The fixed methods require you to pick an interest rate. Under Notice 2022-6, the maximum is the greater of 5% or 120% of the federal mid-term rate for either of the two months before distributions begin.¹ The 120% mid-term rate published for April 2026 is 4.59%, so the 5% floor is the binding cap.⁴ A higher rate produces a larger annual payment, so most people who want maximum income choose the full 5%. The rate you select is locked in for the life of the plan.

The 5% floor is the most significant change Notice 2022-6 made from the older guidance it replaced. Before, the cap was simply 120% of the mid-term rate, and in low-rate environments that could force very small payments.

Life Expectancy and Mortality Tables

The RMD and amortization methods use one of three tables: the Uniform Lifetime Table, the Single Life Table, or the Joint and Last Survivor Table. The Joint and Last Survivor Table can be used even if the named beneficiary is not your spouse. The annuitization method uses a separate mortality table specified in Treasury regulations. All of these tables were updated effective 2022, and Notice 2022-6 requires the updated versions. You can find them in the appendices to Notice 2022-6 and in IRS Publication 590-B.⁵

Splitting an Account to Control the Payment

Every SEPP is calculated on a single account. You cannot pool multiple IRA balances into one calculation, and if you run SEPPs on two accounts, each account’s payment must actually come out of that account.³

That constraint doubles as a planning tool. If your IRA holds $800,000 and the formula produces more income than you need, you can split it into two IRAs before the plan begins, say $400,000 each, and run SEPP only on one. You get a smaller payment, a smaller tax bill, and a second account still growing tax-deferred. The split has to happen before the first SEPP distribution, because any transfer out of the SEPP account after payments start is treated as a modification.

You can also run separate SEPP plans on separate accounts, each with its own start date and duration clock. It adds bookkeeping, but it gives you far more control than locking the entire retirement balance into one withdrawal schedule.

How Long Payments Must Continue

Once you start, you must keep taking the payments until the later of two dates: five full years after the first payment, or the date you reach age 59½.³

The “later of” rule catches more people than any other feature of the exception. Start at 50 and the five-year mark arrives at 55, but you have to continue until 59½, a commitment of about nine and a half years. Start at 57 and five years carries you to 62, so the five-year clock controls. The IRS gives the example of a taxpayer who starts SEPP at age 56 with the first payment in December: distributions cannot stop until December five years later, even though 59½ came almost two years earlier.³

Once both conditions are satisfied, the SEPP obligation ends. You can stop distributions, change the amount, or take a lump sum, all without penalty. No notice to the IRS is required; you simply stop claiming the exception on your return.

What Busts the Plan and What It Costs

Modifying a SEPP before the required period ends is one of the more expensive tax mistakes available. The IRS does not just penalize the year of the change. It applies the 10% additional tax to every distribution taken under the plan since the beginning, plus interest on those deferred penalties from the date of each payment.³ Breaking a nine-year plan in year eight means paying back penalties plus interest all the way to year one.

The IRS treats each of these as a plan-busting modification:

Taking more or less than the formula requires in any year.
Making any contribution to the SEPP account during the required period.
Rolling over or transferring part of the account to another institution.
Skipping a scheduled payment or failing to take the full annual amount.

If the account is exhausted by scheduled payments before the required period ends, the plan is considered completed, not busted. The IRS does not penalize you for running out of money.

The One-Time Switch to RMD

If you started with either fixed method, you can switch to the RMD method one time without triggering recapture. The switch is permanent, and every remaining year must use the RMD calculation. This safety valve exists because fixed payments can become unsustainable when investment values drop sharply; the RMD method automatically shrinks the payment as the balance falls. After the switch, any further deviation is a modification.³

Death and Disability

If the account holder dies or becomes disabled during the SEPP period, the plan can be modified or stopped without recapture. Outside of these narrow exceptions and the one-time RMD switch, no change to the schedule is safe.³

Getting the First Year Right

The plan officially starts on the date you receive the first payment. There is no proration for a mid-year start: the full annual amount must come out during that first calendar year. If you take payments in installments, the installments paid before December 31 have to add up to the full annual figure. Taking less, even in a short first year, is a modification.³ That makes late-year starts unforgiving. Beginning in November may mean taking the entire annual amount in one or two payments before year-end.

Documentation and Tax Reporting

The IRS does not approve SEPPs in advance. There is no filing, no registration, no confirmation letter. You start taking payments and claim the exception on your return, which means your own records are your only defense if the plan is ever questioned.

Before the first withdrawal, assemble a file with the account statement showing the balance on your valuation date, the specific life expectancy or mortality table you used, the revenue ruling that published the federal mid-term rate for your chosen month, and a written calculation showing how you arrived at the annual payment. Keep a copy of Notice 2022-6 with the file.¹ Retain everything for at least three years after the SEPP obligation ends, because recapture can reach back to the first payment.

Each year, your custodian will issue Form 1099-R. In Box 7, the distribution should be coded 2, “early distribution, exception applies.” If you see Code 1 instead, you can still claim the exception yourself.⁶ To claim it, file Form 5329 with your return and enter exception code 02 on line 2. File Form 5329 every year distributions are taken under the plan, even when the 1099-R already shows Code 2, because the explicit filing reduces the chance of an automated notice.⁷

One last thing worth remembering: the exception only waives the 10% additional tax. SEPP distributions from a traditional IRA are still ordinary income, and a large annual payment can push you into a higher bracket. Run the tax projection before you commit to a method, because once payments begin the amount is locked.

1
Internal Revenue Service. Notice 2022-6 – Determination of Substantially Equal Periodic Payments
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Substantially Equal Periodic Payments
4
Internal Revenue Service. Revenue Ruling 2026-7 – Applicable Federal Rates
5
Internal Revenue Service. Distributions from Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. Instructions for Forms 1099-R and 5498
7
Internal Revenue Service. Instructions for Form 5329