The two methods
Amortization
A fixed payment, like a mortgage in reverse, over your life expectancy at the chosen rate. It gives the largest amount and never changes.
RMD
Balance divided by life expectancy, recalculated every year. Smaller payments that move with the market. You may switch to it once from a fixed method.
The commitment
Payments must continue for five years or until 59½, whichever is later. Change the amount early and the 10% penalty returns on everything taken.
Before you start a 72(t) plan
- Split your IRA first if you need less. A 72(t) plan applies to one account, so you can size it by moving part of the balance into a separate IRA.
- Don't add to or take extra from that IRA while the plan runs. Both count as modifying the series.
- Payments are still ordinary income. The 72(t) exception removes the 10% penalty, not the income tax.
What next
Questions
What is a 72(t) distribution?
A series of substantially equal periodic payments (SEPP) from an IRA. Under IRS rules they are exempt from the 10% additional tax on early distributions.
Which interest rate can I use?
For the fixed methods, any rate up to the greater of 5% or 120% of the federal mid-term rate for either of the two months before payments start (IRS Notice 2022-6).
Can I use a 72(t) plan on a 401(k)?
Yes, but only after you separate from that employer. Many people roll the 401(k) into an IRA first. If you left the job in or after the year you turned 55, the rule of 55 may be simpler.
What happens if I break the plan?
The 10% additional tax applies retroactively to all payments taken before 59½, plus interest. Death or disability are exceptions.