Priya is 51 and has just walked out of a federal job she held for 18 years. She took a deferred resignation, so no immediate FERS annuity is coming. Her pension is a long way off. She has $640,000 in a rollover IRA, a spouse who is still working part-time, and a gap of about eight years before she turns 59½. Her question is simple: can she get at some of that money without handing 10% to the IRS on top of regular income tax?

She can, but only if she is willing to follow a rigid set of rules. That is what Section 72(t) is for.

What the rule does

Normally, taking money from an IRA or a workplace plan before 59½ triggers a 10% additional tax. Section 72(t) carves out an exception for a series of substantially equal periodic payments, usually called SEPP. You still owe ordinary income tax on each payment. You just skip the 10% penalty.

The price is commitment. Once you start, you are locked into the schedule.

The lock-in period

Payments must continue for five full years or until you reach 59½, whichever comes later. Start at 52 and you are committed for seven and a half years. Start at 57 and you are committed for five, ending at 62.

Break the schedule, and the IRS applies the 10% penalty retroactively to every payment you took, plus interest. Suppose you took $30,000 a year for four years and then changed course. You would owe $12,000 in penalty on the $120,000 withdrawn, plus interest back to the first year. That is the trap people fall into.

The three calculation methods

The IRS recognizes three ways to compute the annual payment. All of them use your account balance and a life expectancy figure from IRS tables.

Required minimum distribution method

You divide the prior year-end balance by a life expectancy factor, and you recalculate every year. The payment moves up or down with your balance. This produces the smallest withdrawals, but it also carries the least risk of running the account dry.

Fixed amortization method

You amortize the balance over your life expectancy using an interest rate you choose, within IRS limits. The payment is the same every year. This usually produces a larger payment than the RMD method.

Fixed annuitization method

This one uses an annuity factor from a mortality table and the same kind of interest rate. The payment is also fixed. In practice it lands close to amortization.

The interest rate matters a great deal. Under IRS Notice 2022-6, you may use a rate up to the greater of 5% or 120% of the federal mid-term rate. A higher rate gives a bigger payment. The rate and the tables are updated, so check irs.gov for the current guidance before you run any numbers.

A worked example

Back to Priya. She does not need $640,000 worth of income. She needs roughly $2,500 a month, or $30,000 a year.

Because the SEPP rules apply per account, she can split her IRA. She sets aside $500,000 in a separate IRA and leaves $140,000 untouched. Using fixed amortization with a 5% rate and a life expectancy of around 35 years, her annual payment comes out near $30,500. The exact figure depends on the current IRS tables and her age on the date of the first payment.

She will take that amount every year until she is 59½, which is more than seven years away. The $140,000 stays invested and is free to be used, or left alone, however she likes. If she needs an emergency withdrawal, she can take it from that second account without touching the SEPP schedule.

This splitting strategy is the most practical feature of 72(t), and it is the one people most often overlook.

What breaks the schedule

The IRS calls a break a "modification." These are the common ones:

  • Taking more or less than the calculated payment
  • Adding money to the SEPP account, including rollovers or contributions
  • Transferring part of the account out in a way that is not a proper split
  • Taking a withdrawal from the account outside the schedule

One narrow exception exists. If you started with fixed amortization or annuitization, you may make a one-time switch to the RMD method. That can help if the account has dropped sharply and your fixed payments are draining it. The switch is permanent, so think carefully before using it.

Death or disability ends the lock-in without penalty. Beyond that, the IRS has very little patience.

Where the TSP fits in

The Thrift Savings Plan can complicate things. If you separate from service in or after the year you turn 55, you may already be able to take TSP withdrawals without the 10% penalty, and no SEPP is needed. Certain federal law enforcement and public safety employees have their own age-50 provisions.

If you left earlier, as Priya did, a TSP withdrawal at 51 would normally be penalized. The TSP offers payments based on life expectancy, and those can fit within the 72(t) exception. But the TSP gives you less control than an IRA does. You cannot choose your own interest rate or carve out a partial account in the same way. Many people who want a custom SEPP roll the money to an IRA first, which also gives them the splitting flexibility described above.

Rolling out of the TSP means giving up its very low expense ratios and the G Fund. That tradeoff deserves a real look before you make the move. Details on TSP withdrawal options and tax treatment are at tsp.gov.

The tradeoffs to weigh

A SEPP is a tool for a specific problem, which is needing income before 59½ with no better source. Before using one, consider the alternatives:

  • Taxable accounts. Spending down a brokerage account first often costs less in tax.
  • Roth contributions. You can withdraw Roth IRA contributions (not earnings) at any time without tax or penalty.
  • Part-time work. Even modest earnings can shrink the amount you need to draw.
  • The age-55 rule. If you are close to that threshold and in a workplace plan, waiting may be simpler.

Then there is the sequence risk. A fixed payment taken from a portfolio that falls 30% in your first two years can hurt badly, and you cannot easily adjust. Fixed payments also do not rise with inflation. A payment that feels comfortable at 52 may feel thin at 58.

State income tax adds another layer, so check how your state treats IRA distributions.

Getting it right

Three habits help. First, run the calculation on a documented worksheet and keep it with your tax records. Second, set up the payments on automatic, tied to the exact dollar amount. Third, have a tax professional who has handled SEPPs before check the setup. The IRS does not approve your plan in advance, though a private letter ruling is possible in unusual cases. If you get it wrong, you will find out years later, when the penalty arrives with interest attached.

For someone like Priya, a well-built SEPP can bridge the eight years until her pension and Social Security take over. It is not complicated once it is set up. It is just unforgiving, and that is the reason to build it carefully.