What is Rule 72(t), or 72(q)? Can I set this up in my Rocket Dollar Account?

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Rule 72(t) allows individuals to make withdrawals from their IRA or 401(k) accounts without being subject to the 10% distribution penalty fee. This allows individuals to dip into their retirement savings for emergencies, but will still be subject to the account holder's normal income tax rate.

How can I take advantage of Rule 72(t)?

To take advantage of, and get early access to your retirement savings you have to take at least five substantial equal periodic payments (SEPPs). These payments will vary between individuals’ life expectancy and can be calculated through IRS-approved methods. These withdrawals also must be made within a specific amount of time which is also determined by the IRS, and you must follow the payment schedule for five years or until you reach age 59 1/2, whichever comes later.

Are there any concerns with 72(t) distributions and a Self-Directed IRA?

Please note that Rule 72(t) should be used as a last resort, and should be kept in your retirement account until you start withdrawing appropriately at age 59 ½. 

If assets are volatile, and you have already calculated your SEPP payments, you could be forced to do the same distribution each year even if your account has dropped in value.

If you invest in an illiquid asset, as some alternative assets are much less liquid than stocks and bonds, you could be forced to sell certain assets well before you intended to meet distributions. 

Potential Pitfalls

  • If you quit or alter your 72(t) payments, the IRS will reinstate the 10 percent penalty retroactively and you’ll pay penalty fees on all the money you collected before age 59-½.
  • The IRS allows a one-time change without assessing a penalty, and in most cases, those calculations result in a decreased payout.
  • 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.

Can Rocket Dollar set up a 72(t) for my Self-Directed IRA, or Roth?

Yes. However, each member will wholly assume any and all risks associated with this process as it is a manual process. You and your tax team would communicate the amount to distribute/withdraw from your IRA (Monthly, Quarterly, or Annually) to our support team. Please note that 72(q) does NOT apply, and cannot be done at Rocket Dollar.

Can Rocket Dollar assist me in calculations?

No. Rocket Dollar does not offer CPA services. We can assist you with making the distributions to a non-taxable account, but all distributions must be handled by the customer or their CPA. 

You can use some popular free online calculators as a guide before speaking with a professional.  

There are three IRS approved methods to use when determining how much you can withdraw from using Rule 72(t):

  • The amortization method
  • Minimum distribution
  • The annuitization method


The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59-1/2, whichever is longer. Further, the SEPP amount must be calculated using one of the IRS approved methods which include:

  • Required minimum distribution method: This is the simplest method for calculating your SEPP, but it also typically produces the lowest payment. It simply takes your current balance and divides it by your single life expectancy or joint life expectancy. Your payment is then recalculated each year with your account balance as of December 31st of the preceding year and your current life expectancy. This is the only method that allows for a payment that will change as your account value changes. Even though this may provide the lowest payment, it may be the best distribution method if you expect wide fluctuations in the value of your account.
  • Fixed amortization method: With this method, the amount to be distributed annually is determined by amortizing your account balance over your single life expectancy, the uniform life expectancy table or joint life expectancy with your oldest named beneficiary.
  • Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. This is one of the most complex methods. The IRS explains it as taking the taxpayer's account balance divided by an annuity factor equal to the present value of an annuity of $1 per month beginning at the taxpayer's age attained in the first distribution year and continuing for the life of the taxpayer. For example, if the annuity factor for a $1 per year annuity for an individual who is 50 years old is 19.087 (assuming an interest rate of 3.8% percent), an individual with a $100,000 account balance would receive an annual distribution of $5,239 ($100,000/19.087 = $5,239). This calculator uses the mortality table published in IRS Revenue Ruling 2002-62, which is a non-sex-based mortality table. Please note that your annuitized SEPP is based on your life expectancy only, and is not based on the age of your beneficiary.

In addition, on July 3rd, 2002, the IRS ruled that you could change your distribution type one-time without penalty from the Annuitized or Amortized methods to the Required Minimum Distribution method. This would allow account holders the option to move from a fixed payment type to a payment that fluctuates annually with the value of their account. The primary reason for this exception is to allow individuals who have suffered large losses, the option to reduce their distribution to prevent their retirement account from being prematurely depleted. For more information on this important exception please see Revenue Ruling 2002-62 on www.treasury.gov.

If payments are changed for any reason other than death or disability before the required distribution period ends, the distributions may be subject to a retroactive application of the Premature Distribution penalty. It is 10% (plus interest) for all years beginning the year such payments commenced and ending the year of the modification. It is important to remember that while 72(t) distributions are not subject to the 10% penalty for early withdrawal, all applicable taxes on the distributions must still be paid. Further, taking any early distributions from a retirement account reduces the amount of money available later during your retirement. Please contact a qualified professional for more information.

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