There are two primary ways[1] to withdraw money from retirement accounts before 59.5 years of age without penalty: the Roth conversion pipeline, and the 72(t), otherwise known as Substantially Equal Periodic Payments (SEPP). The 72(t) doesn't get as much coverage, so we shall remedy that today.

What Exactly is the 72(t)?

72(t) gets its name from the section of the tax code it is prescribed in: 26 US Code § 72(t)

(t) 10-percent additional tax on early distributions from qualified retirement plans

(1) Imposition of additional tax
If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
(2) Subsection not to apply to certain distributions
Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:

(A) In general
Distributions which are-

(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,

(4) Change in substantially equal payments

(A) In general

(i) paragraph (1) does not apply to a distribution by reason of paragraph (2)(A)(iv), and
(ii) the series of payments under such paragraph are subsequently modified (other than by reason of death or disability or a distribution to which paragraph (10) applies)-

(I) before the close of the 5-year period beginning with the date of the first payment and after the employee attains age 59½, or
(II) before the employee attains age 59½,

the taxpayer's tax for the 1st taxable year in which such modification occurs shall be increased by an amount, determined under regulations, equal to the tax which (but for paragraph (2)(A)(iv)) would have been imposed, plus interest for the deferral period.

[For brevity I've left out the other ways that you can avoid penalties on distributions].
[I've added emphasis to the "or" in 26 US Code § 72(t)(4)(i)(I)]

There are two important takeaways here

  1. You can withdraw money from retirement accounts penalty free before 59.5 years of age if you make "substantially equal periodic payments" out of the account. In this context "payments" means withdrawals.
  2. There are very heavy penalties for failing to continue the SEPP once you elect to start the SEPP. If you do not continue your SEPP for at least 5 years, or until you reach 59.5 years of age, whichever comes later, you will owe all the taxes that you would have paid if the 72(t) exception wasn't in effect, plus interest. In other words, if you start your SEPP before 54.5 years of age and fail to continue your SEPP until you reach 59.5 years of age, you will owe an additional 10% in taxes on all SEPP withdrawals made previously.

There's an additional note from the IRS

If [SEPP] distributions are from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply.

In this context "qualified plan" means a workplace retirement plan such as a 401(k) or 403(b) (not a 457(b), because you don't need the 72(t) for the 457(b) anyways).

What Constitutes "Substantially Equal Periodic Payments"?

As best as I can tell, SEPP isn't defined in the law. Fortunately, unlike "substantially identical" securities, which has never been defined in the context of tax loss harvesting, the IRS defines SEPP in Rev. Rul. 2002-62. There are three different methods you can use for SEPP:

  1. the required minimum distribution (RMD) method
  2. the amortization method
  3. the annuitization method

You must withdraw annually exactly the amount calculated by the method you choose, otherwise you will face the 10% penalty on all previous withdrawals.

Life Expectancy Tables

All three of these methods require the use of a life expectancy table. Again from IRS Rev. Rul. 2002-62

(a) Life expectancy tables. The life expectancy tables that can be used to determine distribution periods are: (1) the uniform lifetime table in Appendix A, or (2) the single life expectancy table in § 1.401(a)(9)–9, Q&A–1 of the Income Tax Regulations or (3) the joint and last survivor table in § 1.401(a)(9)–9, Q&A–3. The number that is used for a distribution year is the number shown from the table for the employee’s (or IRA owner’s) age on his or her birthday in that year. If the joint and survivor table is being used, the age of the beneficiary on the beneficiary’s birthday in the year is also used.

You can find the 2018 edition of § 1.401(a)(9)–9 of the Income Tax Regulations here.

Interest Rates

The last two methods require you to choose an interest rate. IRS Rev. Rul. 2002-62:

(c) Interest rates. The interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate (determined in accordance with § 1274(d) for either of the two months immediately preceding the month in which the distribution begins). The revenue rulings that contain the § 1274(d) federal midterm rates may be found at,,id=98042,00.html.

I left the link in the original revenue ruling as is. That link is no longer valid, and even if it were it would reference an interest rate set in 2002.
You can find the current federal mid-term rate here. The higher the interest rate, the higher your withdrawal.

The RMD Method

From Rev. Rul. 2002-62

(a) The required minimum distribution method. The annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year. If this method is chosen, there will not be deemed to be a modification in the series of substantially equal periodic payments, even if the amount of payments changes from year to year, provided there is not a change to another method of determining the payments
In the case of the required minimum distribution method, the same life expectancy table that is used for the first distribution year must be used in each following year. Thus, if the taxpayer uses the single life expectancy table for the required minimum distribution method in the first distribution year, the same table must be used in subsequent distribution years.

This method is probably the easiest to understand: each year, take the current account balance, divide it by the number in your chosen life expectancy table, and that's how much you have to withdraw that year.

This is the only method that will give you a variable payout per year. I'm not sure how this constitutes "substantially equal," but hey I'm not the IRS.

When is the Account Balance Taken?

From IRS Rev. Rul. 2002-62

(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002, to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on December 31 of the prior year or on a date within a reasonable period before that year’s distribution.

The Fixed Amortization Method

From IRS Rev. Rul. 2002-62

(b) The fixed amortization method. The annual payment for each year is determined by amortizing in level amounts the account balance over a specified number of years determined using the chosen life expectancy table and the chosen interest rate. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

The Fixed Annuitization Method

From IRS Rev. Rul. 2002-62

(c) The fixed annuitization method. The annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the taxpayer’s age and continuing for the life of the taxpayer (or the joint lives of the individual and beneficiary). The annuity factor is derived using the mortality table in Appendix B and using the chosen interest rate. Under this method, the account balance, the annuity factor, the chosen interest rate and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

You Can't Contribute to or Make Other Withdrawals from the Account Upon Starting SEPP

From IRS Rev. Rul. 2002-62

(e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable

Remember, a modification to the SEPP results in paying penalties.

You Can Create a New IRA and Do SEPP Just For That IRA

Not that I searched through everything, but I never found in the US code, regulations, or IRS rulings that explicitly stated that you are allowed to start SEPP for just one of your retirement accounts. This is not a trivial concern; for the backdoor Roth, when you make a conversion from a traditional IRA with contributions that were not deducted, the contributions from ALL traditional IRAs you own, not just the traditional IRA that you're converting, are considered when calculating the taxable portion of the conversion. It is certainly conceivable that a similar principle could apply here.

Fortunately, I found several articles from financial professionals that say you can initiate SEPP from one retirement account and not have to take the SEPP for the other accounts. [2] [3] [4]

To get the withdrawal amount you want, you can create a new IRA (before you start the SEPP) and rollover only the amount necessary to generate the desired income using one of the three formulas.

Which Method Should I Pick?

Obviously this will depend on your personal situation, but here are some things to consider.

Use a Calculator

There are numerous 72(t) calculators available on the Internet. This is first one I found. I haven't verified if it's actually correct but I don't have any reason to doubt it.

You're Allowed to Change Your Method Once*

* If you used a fixed method.
From IRS Rev. Rul. 2002-62

(b) One-time change to required minimum distribution method. An individual who begins distributions in a year using either the fixed amortization method or the fixed annuitization method may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years and the change in method will not be treated as a modification within the meaning of § 72(t)(4). Once a change is made under this paragraph, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be a modification for purposes of § 72(t)(4).

If can't decide between one of the two fixed methods (amortization or annuitization) vs the RMD method, pick one of the two fixed methods. You can always switch to the RMD method later.

The RMD Method Generally Results in Lower Withdrawals

This of course depends on market performance, as your withdrawal amount is dependent on the year to year balance of your retirement account, but it's a reasonable assumption. You can play with a 72(t) calculator like I linked above to see what average market return would be required for the RMD method to result in similar withdrawals to the other two methods.

You Have Some Control Over Withdrawal Amounts with the RMD Method

While you must use the same life expectancy table for the duration of your SEPP obligation, you have some control over what life expectancy value gets chosen each year if you have a beneficiary on your account and choose the joint and survivor life expectancy table.
From IRS Rev. Rul. 2002-62

(b) Beneficiary under joint tables. If the joint life and last survivor table in § 1.401(a)(9)–9, Q&A–3, is used, the survivor must be the actual beneficiary of the employee with respect to the account for the year of the distribution. If there is more than one beneficiary, the identity and age of the beneficiary used for purposes of each of the methods described in section 2.01 are determined under the rules for determining the designated beneficiary for purposes of § 401(a)(9). The beneficiary is determined for a year as of January 1 of the year, without regard to changes in the beneficiary in that year or beneficiary determinations in prior years. For example, if a taxpayer starts distributions from an IRA in 2003 at age 50 and a 25-year-old and 55- year-old are beneficiaries on January 1, the 55-year-old is the designated beneficiary and the number for the taxpayer from the joint and last survivor tables (age 50 and age 55) would be 38.3, even though later in 2003 the 55-year-old is eliminated as a beneficiary. However, if that beneficiary is eliminated or dies in 2003, under the required minimum distribution method, that individual would not be taken into account in future years. If, in any year there is no beneficiary, the single life expectancy table is used for that year.

In order to make this work, you need to have at least one, ideally several, people to choose from that you are willing to name as beneficiaries to your account. It would certainly make estate planning more complicated.

How Does This Compare to the Roth Conversion Pipeline (RCP)?

(If you aren't already familiar with the Roth conversion pipeline, here's a reference.)

For reference, a 35 year old single person with $100k in a retirement account using the single life expectancy table and a 3% interest rate (the maximum allowable interst rate is 3.65% as of this writing) can withdraw up to $3939/year via SEPP. An older person has a higher maximum distribution amount.

Initially, this $3939/yr would represent a 3.9% withdrawal rate. However, this is not the same as a 3.9% withdrawal rate in the context of the Trinity Study and safe withdrawal rates; safe withdrawal rate studies assume that the retiree withdraws an inflation adjusted amount every year. The SEPP is not inflation adjusted.

SEPP is Far Less Flexible

With the Roth conversion pipeline, you are free to convert however much you want on a year to year basis. With the SEPP, you must withdraw exactly the amount prescribed by the formula, no more, no less.

But SEPP Actually Solves a Potential Problem with the RCP

Assume Alice and Bob have been executing the Roth conversion pipeline for seven years. In year six, they withdrew year one's conversion amount, and in year seven, they withdrew year two's conversion amount. They consistently spend around $40,000/yr, and thus converted this amount, with inflationary adjustments, every year. Because of their consistent spending, they spent essentially all of the amounts they withdrew from their Roth accounts.

It's now June of year eight. They withdraw year three's conversion amount. Life is going along well, until all of a sudden Alice's mother gets very sick. She is going to need a caretaker.

Alice and Bob decide to move close to her mother. Unfortunately, she lives in a high cost of living area - significantly more expensive than where Alice and Bob used to live. Alice and Bob quickly realize that they will need roughly an additional $15,000/yr to live. They can start converting an extra $15,000/yr from their traditional IRAs, but it will take 5 years for them to be able to spend that extra $15,000/yr.

Instead, Alice and Bob open a new IRA, rollover some money to it, and start a SEPP of $15,000/yr.

Several years later, Alice's mother passes away. Alice and Bob decide to move back to their old city, where they only need $40,000/yr. The SEPP is still paying out $15,000/yr, but they can convert less from their traditional IRA each year to compensate. Furthermore, with the RCP, they have the option of simply not withdrawing everything they converted five years prior.

The SEPP solves a potential problem with the RCP: the RCP takes five years to adjust if your life expenditures suddenly increase. And as you saw in this example, you don't have to choose between SEPP and RCP; the SEPP can supplement income from the RCP if you have a sudden change in annual spending.

SEPP May Not Be Viable in a Really Low Interest Rate Environment

Remember how a 35 year old using a 3% interest rate could withdraw almost 4% of their IRA via SEPP? While a 3% interest rate is allowed today for SEPPs, back in May 2012, the maximum allowable interest rate was 1.56%. If you plug that into a 72(t) calculator, a $100k IRA could only sustain up to a $2,955 annual SEPP, or an almost 3% withdrawal rate.

If you had planned on a 4% withdrawal rate and saved assets only in retirement accounts because you planned on using SEPP, but wanted to start your SEPP in May 2012, that would be a big problem.

The numbers do get better if you start the SEPP at a later age: at 45, with a 1.56% interest rate, the maximum initial distribution of a $100k IRA is $3,455, or almost a 3.5% withdrawal rate.

Granted, the low interest rates that we've experienced for the past decade or so were unprecedented. Will we ever see interest rates this low again? I'm not sure.

It Takes Planning to Make SEPP Work in the Face of Inflation

The annuitization and amortization methods do not have any inflationary adjustments (or any adjustments at all for that matter). You may not notice it initially, but without being able to increase withdrawals from your portfolio to account for inflation, you will eventually see vast reductions in your purchasing power.

Possible Solution #1: Create More SEPPs

As I stated earlier, you can have multiple retirement accounts with SEPPs from each of them. So just roll over some money into a new IRA and start a SEPP from that. Problem solved, right?

Unfortunately, this is not practical if you intend for the SEPP to be your sole source of income.

Suppose John has $1M in a traditional IRA (he's rolled over his 401(k)s into IRAs). This is his entire portfolio. He quits working and decides to start a SEPP. His current lifestyle costs $40,000 a year, and chooses a SEPP method and interest rate that gets him $40,000 in SEPP withdrawals each year.

Seveal years go by and because of inflation, his expenses go up. He needs to be able to withdraw more money from his IRA. He knows he can't get any more money from this IRA, so he decides to rollover some money from this IRA to a new IRA, and start a SEPP from that.

Unfortunately, he just violated one of the rules of the SEPP: once a SEPP is started, the only amount of money that can leave the account is the SEPP amount. A rollover of assets is not allowed.

Possible Fix for Solution #1: Create a New IRA Before Starting SEPP

In order for John to start a new SEPP from a new IRA years after starting his first SEPP, he needs to makes some adjustments before he starts. Instead of starting the SEPP from his $1M traditional IRA, he rolls over $400k to traditional IRA #2. He then starts the SEPP from IRA #1. After seven years, when John finally feels the pinch of inflation, he plans to start a new SEPP from IRA #2.

The potential problem here is that the depending on the prevailing federal interest rate at the time, it may not be possible to withdraw $40,000/yr from IRA #1 via SEPP.

The more money you rollover to IRA #2 to get an inflationary adjustment later, the less money you are able to withdraw via SEPP from IRA #1.

Possible Solution #2: Use the RMD Method

The RMD method generally results in increasing withdrawals over time. The life expectancy numbers are such that under average stock market conditions, you withdraw less than the stock market appreciation. And generally speaking, the stock market more than keeps up with moderate inflation

Unfortunately, unless interest rates are absurdly low, the RMD method generally results in a much lower initial withdrawal. Recall that a 35 year old would withdraw almost 4% using SEPP and a 3% interest rate. Under the RMD method, the same 35 year old would only be able to withdraw 2% in the first year. And a 45 year old would only be able to withdraw 2.5% in the first year. To make this method viable, there would need to be other assets to draw from, at which point, you might as well use the RCP instead.

Possible Solution #3: Use a Higher Fixed SEPP to Begin With

Knowing that your SEPP withdrawals won't be inflation adjusted, you could start your SEPP at a higher withdrawal rate than your intended safe withdrawal rate.

For example, if you intended to withdraw an inflation adjusted 4% of your portfolio every year, you could instead use a fixed formula that initially has you withdrawing 5% of your portfolio. Over time, because of inflation, your inflation adjusted withdrawal rate will drop to 4% (and drop even further as time goes on). You could then invest the excess withdrawal in the early years in a taxable account. Once your inflation adjusted withdrawal rate from your IRA drops below 4%, you can start withdrawing from your taxable account to supplement the income.

For this post, I won't be calculating if the necessary growth rate in the taxable account for you to continuously sustain a 4% inflation adjusted withdrawal rate is actually reasonable. If I get around to doing this, I'll update the post. Off the top of my head, this does sound feasible.

Unfortunately, this does face the same potential problem as noted in the possible fix for solution #1: the maximum allowable interest rate at the time you start your SEPP may not allow you to withdraw 5%.

Also, by withdrawing more than you need initially, you're paying more in taxes, thanks to the progressive nature of tax rates, than if you were to use the RCP (assuming you correctly guess your spending five years from now).

Are You Expecting Financial Aid for College for your Child?

I mentioned this in a previous post. Retirement assets do not count against you for the Free Application for Federal Student Aid (FAFSA), while taxable assets do. The RCP requires you to have 5 years of assets outside of your retirement accounts. These taxable accounts will count against you for financial aid.

It's hard for me to say if the SEPP is a viable alternative to the RCP. Inflationary adjustments to your portfolio withdrawals are important, and the SEPP is not exactly conducive to them. The strategy of withdrawing more than your intended withdrawal rate initially needs further investigation.
However, perhaps there is a better strategy than the ones I laid out for handling inflation. If one day the RCP is closed then we'll have financial professionals smarter than I am figuring out better strategies.

While the SEPP may not be a viable alternative to the RCP, it certainly provides a way to supplement RCP income if your annual expenses suddenly increase and you have no other way to cover the deficiency for five years before the adjustments to the RCP kick in.

  1. There are a couple other ways as well, but these have even more restrictions: if you leave your employer at the age of 55 or older, you can withdraw money from that employer's 401(k) without penalty. Also, if you have a 457(b), you can withdraw money penalty free once you leave your employer ↩︎

  2. ↩︎

  3. Natalie Choate's Book via Bogleheads wiki ↩︎

  4. Forbes ↩︎