Financing + 1 more
Date: September 15, 2020

What You Need to Know About Rule 72t and Early Retirement

Planning for retirement can be a complicated process. Retiring early can offer an entirely different set of concerns.

For example, you typically pay a 10 percent penalty if you tap into IRA funds before age 59-½. But there are a handful of IRS exemptions that allow you to make penalty-free withdrawals before then. In special situations, you can use funds at any time for:

  • Qualified higher-education expenses
  • Medical expenses
  • Disability
  • Death
  • First-time home purchase
  • Health insurance premiums (if you’re unemployed)
  • Equal periodic payments per Rule 72t

Rule 72t may be an exemption you’ve never heard of, but it can be an important tool for those considering early retirement – either because you’re ready to leave the workforce or your employer has given you an early retirement offer.

Early retirement may sound great, but what is a 72t, how does it work and what do you need to consider before making a decision? With more and more people retiring early these days, we wanted to share some important questions – and answers – to keep in mind if you’re considering or have received an early retirement offer from your employer.

What is a 72t?

Simply put, 72t is an IRS rule that lets you withdraw money from your retirement accounts before age 59-½ without incurring a 10 percent penalty. It’s called “72t” because of its location in the IRS code.

Anyone can use rule 72t to tap into retirement funds, but there’s one catch. The rule states you must take Substantially Equal Periodic Payments (SEPPs) each year for five years or until you reach age 59-½, whichever is longer. The only exception is if you become disabled or die.

Here are three examples:

  • If you start taking 72t payments at age 50, you’ll have to continue until age 59-½ (for a total of 9-½ years).
  • If you start taking 72t payments at age 55, you’ll have to continue until age 60 (for a minimum of five years).
  • If you start taking 72t payments at age 57 and become disabled at age 58, you’ll be able to stop payments at age 58 because a disability counts as an exception.

Pitfalls to Watch Out For

Rule 72t comes with a long list of potential pitfalls. Some of those include:

  • If you quit or alter your 72t payments, the IRS will reinstate the 10 percent penalty retroactively and you’ll pay fees on all the money you collected before age 59-½.
  • All withdrawals count as taxable income, which could push you into a higher tax bracket.
  • Depleting retirement accounts now means you run the risk of not having enough money to last through retirement.
  • You can’t add or remove funds from your IRA while a 72t payment plan is in place. Your account is essentially frozen until you complete your payments.

As you can see, there’s a lot to discuss if considering this route. Talk with a financial advisor to fully understand your options before making a decision you could regret later on.


It’s never too early to start planning for the future. Contact Watts Gwilliam and get the conversation started.


When Should I Use Rule 72t?

You should only consider a 72t payment plan if you’re under age 59-½ and don’t qualify for any other IRS exemptions, including those for:

  • Disability
  • Illness
  • Qualified educational expenses
  • First time home purchase

That said, 72t payments could be right for you if:

  • You have a well-structured retirement plan that includes multiple different assets
  • You’re comfortable with the time commitment that comes with 72t payments
  • You’re considering retiring early and need to tap into funds before age 59-½

5 Things to Consider Before Accepting an Early Retirement Offer

We’re currently in the middle of the worst economic downturn since the Great Depression. Many companies are offering employees early retirement packages – or buyouts – in an effort to reduce overall costs.

If your company has offered you an early retirement package, here are 5 questions to consider before you say yes.

1. What’s included in your early retirement offer?

Most early retirement packages come with severance pay as a standard benefit, although that’s not always a given. Start by reviewing the details of your early retirement package to see what you’re getting.

Severance pay is typically calculated based on your salary and how long you’ve been with the company. The standard is one- or two-week’s pay for every year you’ve been with the company. For example, if you make $1,500 a week and you’ve been with the company for 20 years, your severance package could be anywhere from $30,000 to $60,000.

Other perks may vary based on the company’s current financial situation.

It’s wise to discuss your options with a financial advisor to plan next steps. Decisions now can affect your income streams in retirement, your lifestyle and even your estate plan.

2. Will you need to get your own health insurance?

Very few employers let their employees remain on a group plan after they’ve retired. If you’re on your company’s health insurance plan, you’ll need to consider what will happen from here.

If you’re at least 65, you may be eligible for Medicare. If that’s not an option, are you able to join your spouse’s plan or will you be left to purchase your own private health insurance. Again, you’ll want to evaluate the cost associated with getting your own plan and how it works in your overall financial plan.

3. Will you enter into retirement or find another job?

If you’re not ready to end your career just yet, consider how employable you’ll be once you leave your current company. What does the job market look like? Are other companies in your industry downsizing? If so, it may be hard to find another job in your field.

If that’s not an option, you could consider leveraging your skills to pursue work in another industry. Or you could start your own consulting business as a way to ease into retirement.

Early retirement is common for athletes, as their competitive years don’t often carry them through to their 60s. At Watts Gwilliam, we work with a lot of athletes to help them navigate their retirement years. For more on what this looks like, click here.

4. How will this impact your Social Security benefits?

You can start taking Social Security as early as age 62, but your benefits increase the closer you wait until age 70. For example, if your full retirement age is 66, you’d only receive 75 percent of your monthly benefit amount if you started withdrawals at age 62. But you’d get 132 percent of your amount if you wait until age 70.

Of course, this isn’t a purely mathematical decision. Even if you could receive a higher monthly payment by waiting, it may not make sense for your financial situation.

5. Can you afford to retire early?

This last question is highly personal. It requires a deep dive into your savings and expenses to see if you have enough money to retire comfortably now. This step can be especially hard to figure out on your own, so it’s wise to work with a trusted financial advisor who can help you answer this question.

A financial advisor can also help you decide if other retirement income options – such as a 72t payment plan – can help you live the retirement you envision for yourself.

The First Step

Committing to 72t distributions is a big decision. Before you make any moves, consult with a financial advisor you trust to see if it’s the best decision for you. These distributions can be very convenient if you’re forced into early retirement, but they can also have major financial implications if you’re not careful.

If you’re considering an early retirement, schedule a conversation with the Watts Gwilliam team. We can review your current financial situation (including any early retirement offers you may have received) and talk through whether a 72t payment plan is the right choice for you.

Watts Gwilliam retirement eBook


David Watts

Dave is one of the firm’s founders. He helps business owners, professional athletes, and other high-net worth clients develop and implement financial plans and strategies. He also specializes in helping those with single-stock positions to diversify and manage their financial lives. Other areas of specialty are wealth transfer plans for concentrated stockholders and business owners; tax minimization strategies for those with employee stock options; cash flow management; and risk management planning.