Rule 72(t), under the Internal Revenue Code, allows for penalty-free early withdrawals from an individual retirement account (IRA), 401(k) or other qualified retirement plan under certain conditions. Normally, withdrawals from these accounts are penalized if taken before the age of 59½, with a few exceptions such as death, disability, or a first-time home purchase.
However, Rule 72(t) allows account owners to take early withdrawals through what are known as Substantially Equal Periodic Payments (SEPP). These payments are a series of substantially equal amounts that occur at least annually and the amount must be calculated using one of the IRS-approved methods: the Required Minimum Distribution (RMD) method, the Fixed Amortization method, or the Fixed Annuitization method.
Once started, the SEPP schedules must be maintained for 5 years or until the account owner reaches age 59½, whichever is longer. If the SEPP schedule is modified before that period, the IRS may impose penalties retroactively to the first year of distribution.
Rule 72(t) is essential as it provides an option for those who retire early or need to access funds in their retirement accounts for another reason without incurring the typical early withdrawal penalty of 10%. Note that even though the 10% penalty is waived under Rule 72(t), the withdrawn amounts are still subject to ordinary income taxes.