Understanding Rule 72(t) for American Family Employees

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'American Family employees considering a 72(t) strategy should take time to understand how long-term withdrawal commitments fit into their broader retirement goals,' — Wesley Boudreaux, a representative of The Retirement Group, a division of Wealth Enhancement.

'American Family employees weighing a 72(t) withdrawal schedule should carefully assess how a long-term income commitment fits into their overall retirement strategy before getting started,' — Patrick Ray, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

1. How Rule 72(t) works for early withdrawals.

2. The IRS-approved methods used to calculate substantially equal periodic payments (SEPPs).

3. Key considerations, benefits, and limitations of using a SEPP plan.

Early Withdrawals With Substantially Equal Periodic Payments (SEPPs)

American Family employees preparing for retirement may benefit from understanding IRS Rule 72(t). This rule allows individuals to access retirement accounts before age 59½ without the standard 10% early withdrawal penalty. This exemption applies when withdrawals follow the Substantially Equal Periodic Payments (SEPP) structure outlined in IRS regulations. These payments must continue for at least five years or until the account holder reaches age 59½, whichever occurs later.

The IRS typically imposes a “recapture” of the 10% penalty on all previous SEPP distributions—along with interest—if a plan is stopped or modified too early. Adjustments can only be made under limited circumstances, such as death, disability, qualified public safety distributions, full account depletion, or a one-time permitted calculation change. ¹

The major benefits and limitations of Rule 72(t), as well as the IRS-approved calculation methods, are summarized below for American Family employees.

What Is Rule 72(t)?

Under Rule 72(t), individuals who withdraw funds from IRAs or employer-sponsored retirement plans such as 401(k)s before age 59½ through a SEPP schedule can bypass the 10% early withdrawal penalty. Even though the penalty is waived, SEPP withdrawals are still treated as taxable ordinary income.

Each SEPP plan must apply to a single retirement account; anyone wanting to withdraw from multiple accounts must establish a separate SEPP plan for each one.

How SEPP Plans Work

Before a SEPP plan is initiated, you must select one of three IRS-approved methods to calculate the annual withdrawal amount:

1. Required Minimum Distribution (RMD) Method

• Annual payments change based on the account balance and IRS life expectancy factors. Using this method generally results in lower withdrawals than the other methods. 

• 2. Fixed Amortization Method

• Annual payments remain the same each year and are calculated using an IRS-approved interest rate, the account balance, and IRS life expectancy formulas.

3. Fixed Annuitization Method

• Annual payments remain consistent throughout the SEPP period and are calculated using an IRS-approved interest rate along with an annuity factor from IRS mortality tables.

• All three methods rely on IRS life expectancy or mortality tables, with the choice determined by whether the calculation uses a single life or joint lifetimes.

The IRS may retroactively impose the 10% penalty if a SEPP schedule is altered before the required commitment is fulfilled.

Benefits of Using the 72(t)/SEPP Rule

10% Early Withdrawal Penalty Is Eliminated

A SEPP schedule removes the 10% early withdrawal penalty that typically applies. For example, bypassing the penalty on a $30,000 annual withdrawal may prevent a $3,000 tax cost.

Creates a Consistent Income Stream

SEPP withdrawals follow a structured pattern, offering a stable source of income before traditional retirement ages.

Flexibility in Calculation Method Selection

Individuals can choose among IRS-approved methods to align withdrawal amounts with their goals.

Drawbacks of Using the 72(t)/SEPP Rule

Reduces Future Retirement Savings

Withdrawing funds early means less money remains invested for later years.

The SEPP Schedule Is Difficult to Change

Except for rare exceptions, altering or stopping SEPP payments before the required period results in penalties and retroactive fees.

No Additional Withdrawals Allowed

Any withdrawal beyond the scheduled SEPP amount may trigger the 10% penalty.

Other Penalty-Free Withdrawal Alternatives

American Family employees may want to review these alternatives before committing to a SEPP plan:

• - Certain IRA withdrawals related to medical expenses, education expenses, disability, or health insurance premiums while still working

• - 401(k) loans, depending on vested balances and loan limits

• - The IRS Rule of 55, which allows penalty-free 401(k) withdrawals for those who leave an employer in or after the year they turn 55.

Each option has distinct rules, so it is important to compare them before choosing the approach that works best for you.

Who Might Consider a 72(t)/SEPP Plan?

A SEPP plan may appeal to individuals—including American Family employees—who:

• - Plan to retire early

• - Need income before pensions or Social Security begin

• - Have sufficient retirement savings

• - Face financial challenges, such as medical needs or major expenses

However, because SEPP plans are rigid and long-lasting, they require careful planning.

How The Retirement Group Can Help

Navigating a SEPP plan can be complicated, and errors can create costly IRS penalties. The Retirement Group can help you evaluate whether a 72(t)/SEPP plan aligns with your retirement goals and guide you through the process.

If you have questions about early retirement planning or evaluating SEPP options, you can contact The Retirement Group at  (800) 900-5867  for assistance.

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Sources:

1. Internal Revenue Service.  Substantially equal periodic payments .  26 Aug. 2025. 

2. Kagan, Julia. “Understanding the 72(t) Rule: Penalty-Free IRA Withdrawals Explained.”  Investopedia , 20 Sept. 2025,  www.investopedia.com/terms/r/rule72t.asp .

3. “What Is 72(t) Rule? How Does SEPP Work?”  Fidelity Viewpoints , 6 Oct. 2025,  www.fidelity.com/learning-center/personal-finance/72t-rule .

4. Schroeder, Jacob. “Retire Before 59.5: The IRS Rule to Unlock Your IRA or 401(k) Cash Penalty-Free.”  Kiplinger , 15 Oct. 2025,  www.kiplinger.com/retirement/how-sepp-72-t-can-help-you-retire-early-and-dodge-penalties .

5. Adams, Hayden. “When Can You Withdraw? 401(k)s and the Rule of 55.”  Charles Schwab , 1 Apr. 2025,  www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55 .