401(k) rollover glossary
72(t) Substantially Equal Periodic Payments (SEPP)
Rule 72(t) allows penalty-free IRA withdrawals before 59½ through fixed annual payments. One wrong move busts the plan and triggers retroactive penalties.
Rule 72(t) — formally, substantially equal periodic payments (SEPP) — is an IRS exception that lets you withdraw from an IRA before age 59½ without the 10% early-withdrawal penalty. In exchange, you commit to a rigid schedule of annual payments calculated by an IRS formula. You still owe ordinary income tax on every withdrawal; only the penalty is waived.
The IRS allows three calculation methods (per Notice 2022-6): the required minimum distribution method (recalculated annually, smallest payments), the fixed amortization method, and the fixed annuitization method (both produce level payments). The interest rate used may be as high as the greater of 5% or 120% of the federal mid-term rate — the 5% floor added in 2022 substantially raised the maximum payment. One method change is allowed: a one-time switch from either fixed method to the RMD method.
The commitment is long: payments must continue for the LONGER of five years or until you reach 59½. Start a SEPP at 45 and you are locked in for roughly 14½ years. Start at 57 and you are locked until 62.
The bust risk is what makes 72(t) dangerous. Any modification of the series — taking an extra withdrawal from the SEPP account, missing a payment, contributing or rolling new money into the account, or stopping early — retroactively applies the 10% penalty to every SEPP payment ever taken, plus interest. Five years into a plan, one $2,000 emergency withdrawal can trigger a five-figure recapture bill.
The standard defense: split your IRA before starting. Size one IRA to generate exactly the payment you need and run the SEPP from it alone; keep the rest in a separate, untouched IRA for emergencies. A withdrawal from the other IRA never modifies the SEPP series.
Before locking in, compare your alternatives. If you left your employer in or after the year you turned 55, the Rule of 55 gives penalty-free access to that 401(k) with no payment schedule and no bust risk — which argues against rolling that money to an IRA at all. A SEPP is the tool of last resort for money already in an IRA. Model your actual liquidity needs before committing.
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Frequently asked questions
- How much can I withdraw under 72(t)?
- The formula decides, not you. The fixed amortization method at the maximum allowed interest rate (the greater of 5% or 120% of the federal mid-term rate) generally produces the largest payment. To hit a target amount, size the SEPP by splitting your IRA first and running the series from an account of the right size.
- What officially counts as busting my SEPP?
- Any modification of the payment series before the later of five years or age 59½ — an extra withdrawal from the SEPP account, a missed or wrong-sized payment, or adding money to the account by contribution or rollover. Exceptions: death, disability, and the one-time permitted switch to the RMD method. A bust means the 10% penalty applies retroactively to all prior payments, plus interest.
- Can I run a SEPP from my 401(k) instead of an IRA?
- The exception exists for employer plans too, but only after you separate from service — and plan administration rarely accommodates it. Most people roll to an IRA first for control. But check the Rule of 55 before rolling: if you left in or after the year you turned 55, the 401(k) already offers penalty-free access without SEPP rigidity.
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This glossary entry provides educational information based on IRS rules. It is not tax or legal advice for your specific situation.