Use Rule 72(t) To Withdraw Money Penalty Free From An IRA

View from Koko Head, Oahu

View from Koko Head, Oahu

After rolling over my 401(k) into an IRA, I’d like to focus on potentially the single most beneficial reason why everyone should convert their 401(k) into an IRA after they leave their jobs: Rule 72(t).

Rule 72(t) allows for penalty-free withdrawals of your IRA account before the age of 59.5 provided that the IRA holder take at least five “substantially equal periodic payments” (SEPPs). The amount depends on the IRA owner’s life expectancy calculated with various IRS-approved methods.

Three IRS approved methods to calculate SEPP:

1) Required minimum distribution method: This method 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. With this method, your payments will change depending on your account value.

2) Fixed amortization method: This method amortizes your account balance over your single life expectancy, the uniform life expectancy table, or joint life expectancy with your oldest named beneficiary. Such a method is more stable.

3) Fixed annuitization method: This method uses an annuity factor to calculate your SEPP. It’s hard enough calculating life expectancy and portfolio performance, let alone forecast interest rates for annuities so let’s skip this method.

The most common withdrawal calculation method is #1. I’d like to use my example for how using Rule 72(t) can help an early retiree extract more income and lead a more comfortable financial life.


Situation: Rolled over my 401(k) of 13 years to a IRA in the spring of 2013.

Estimated IRA value: $400,000.

Investment style: Aggressive, but open to be more conservative if I use Rule 72(t).

View on taxes: Hate them!

During my working years, I was unfortunate enough to pay the top federal income tax brackets of 35-39.6%. Given such a high tax bracket, I gladly maxed out my 401(k) every year to save on taxes. Because I earned more than $69,000 ($115,000 income limit if married and filing jointly), I wasn’t allowed to contribute to a traditional IRA sadly enough. For those of you who have such an opportunity to contribute, don’t waste it.

My last full year of 401(k) contribution was for $17,000 in 2012 (you can now contribute a max of $18,000 tax free in 2015). At a 35% federal income tax rate, I was able to save $5,950 in federal income taxes in addition to $1,836 (10.8%) in California state income taxes. The total tax savings by maxing out my 401(k) comes out to roughly $7,786.

Now that I am retired, I’ve managed to get my Adjusted Gross Income (AGI = income after deductions) down to the 25% tax bracket. If I utilize Rule 72(t) based on a minimum distribution method, I can now withdraw from my converted IRA at a 10% lower tax rate (35% – 25%)!

Based on my 401(k) dashboard where I’ve run different retirement scenarios, it states that I contributed roughly $200,000 to my 401(k) over 13 years with the remaining $200,000+ coming from match, profit sharing, and investment returns. To take a conservative approach to tax savings, all I would therefore do is multiply $200,000 in contributions by my tax savings of 10% to equate to $20,000 in less taxes I’ll have paid in my 13 year career. I can also simply take my entire pre-tax retirement fund balance of $400,000 and multiply it by 10% to get $40,000 in tax savings since all of the money may eventually come out.

The bottom line: I’m able to save $20,000 – $40,000 in federal income taxes with Rule 72(t). If I include state income taxes, the savings grows by $6,000 to up to $40,000 if I move to a no income tax state.


Besides the tremendous tax savings I know I will instantly get if I use Rule 72(t), I can potentially also set myself up for a potential perpetual income stream for eternity, or until the world comes to an end! Please read on to find out how.

Consideration: Change investment goal from aggressive capital appreciation to long term dividend aristocrat stocks for income.

Withdrawal calculation: Based on a single life expectancy of 85, I simply take 85 – current age 35 = 50 and divide my IRA value of $400,000 by 50 to get $8,000 a year in withdrawal. $8,000 a year equates to a 2% withdrawal yield on my entire IRA portfolio. Coincidentally, the dividend yield on the S&P500 is also around 2%.

Specific strategy #1: If I dump my entire IRA into the S&P 500 ETF SPY or SDY, the S&P500 Dividend ETF, I could theoretically withdraw $8,000 a year for the rest of my life without reducing much if any of the principal! One can conservatively assume that over the course of 50 years, stocks and therefore my IRA and dividend interest will grow at least the pace of inflation.

Specific strategy #2: Instead of investing my entire IRA into the S&P 500 index SPY, I can focus on a smaller portfolio of higher yielding dividend stocks with dividends all above 3%.  Here are some names: AT&T (4.2% dividend yield), HCP (3.5%), Consolidated Edison (3.5%), Legett & Platt (3.3%), Nucor (3.1%), Chevron (3%), Kimberly Clark (3%), Procter & Gamble (3%), Johnson & Johnson (3%), McDonald’s (3%), Clorox (3%). With a blended dividend yield of around 3.4%, I can now withdraw $13,600 a year at a 25% tax rate without ever drawing down principal.

$8,000 – $13,600 a year in dividend income isn’t much, but it’s much more than what I thought I would ever receive before the age of 59.5. It’s good to know that this is a potentially accessible stream of passive income to add to my passive income portfolio.


Age 35 is admittedly a little early to start withdrawing from an IRA using Rule 72(t) as it will take away from maximum compounding. $400,000 is a nice amount, but as we’ve seen in the above calculations, the income stream isn’t very strong. Let’s use three examples which will help reduce the number of years for withdrawal in order to boost the income stream.

Example #1: If I start withdrawing at age 35 with on a 85 single life expectancy estimate, 50 years of withdrawal gives a 2% yield vs. a ~2.2% S&P500 dividend yield. I basically withdraw 100% of what the S&P500 spits out every single year in dividends plus a small 0.2% cushion.

Example #2: If I started withdrawing at age 45 with a 85 single life expectancy estimate, 40 years of withdrawal gives a 2.5% yield based on $10,000 a year divided by $400,000.  I’m now slightly over the S&P 500 dividend yield and will probably look to buy the highest S&P 500 dividend yielding stocks via the ETF SDY at the very least.

Example #3: If I start withdrawing at age 55 with a 85 single life expectancy estimate, 30 years of withdrawal gives a 3.3% yield based on $13,333 a year divided by $400,000. This is roughly the maximum I can currently withdraw without spending down the IRA principal.

Example #4: Let’s say I start withdrawing at age 45 with a 95 single life expectancy estimate. This leads back to a 50 year withdrawal level with a 2% yield. On the one hand, living longer increases the likelihood that a IRA portfolio will last forever. On the other hand, you’ll need more money to pay for your life. Hence, it’s better to assume you live longer than the median age and build alternative income streams.


I’ve always mentally written off my 401(k), which is now an IRA because I never wanted to depend on government sponsored pre-tax programs to survive in retirement. The same thing goes for social security. This is the reason why I’ve aggressively saved more than 50% of my after tax income every year I worked. If all I had was my 401(k)/IRA in retirement and no other savings or income streams, I’d be screwed because I never planned on working for 37.5 consecutive years after college. I knew after two years on Wall Street that I wanted to retire by 40.

With Rule 72(t), I can now conservatively utilize all my years of pre-tax savings at a 10% lower tax rate to enjoy now. If I maintain a 2% withdrawal rate or less, I should be able to receive $8,000 a year for the rest of my life and potentially pass on the principal to a loved one. The issue I have is that $400,000 just isn’t a significant enough amount of money for me to enact Rule 72(t). I’ve got enough passive income to pay for all expenses and then some. Instead, I would like to try and grow the $400,000 into $1 or $2 million dollars over the next 10 years and then start withdrawing at age 45 or thereabouts.

To grow your portfolio, it’s clearly better to reinvest the dividends into the markets. However, if you are retired, need the income, or don’t plan to live for a long time, utilizing Rule 72(t) is a no brainer. The purpose for all those years of saving for retirement is to actually spend the money in retirement. From a financial standpoint, I can’t think of much worse things than saving for decades only to die without being able to spend your hard earned money.


Manage Your Wealth And Cut Investment Fees: If you have a 401(k) or IRA, I highly recommend signing up with Personal Capital and running your portfolio through their free Investment Fee Analyzer tool. I ran my 401(k) through their system and discovered I am paying $1,700 in annual fees I had no idea I was paying! After converting my 401(k) to a rollover IRA, I ran the portfolio through their Investment Fee Analyzer again to see that after some investment changes, I’m now only paying $515 a year. You should do the same exercise.

One of their best new features is their new Retirement Planning Calculator that pulls in your real data after you’ve linked all your account, and spits out future financial scenarios based on a sophisticated Monte Carlo simulation. Their Retirement Calculator is seriously the best on the web today. Finally, you can keep track of your finances and monitor your net worth with Personal Capital as well. Leverage free tools on the internet to make your retirement a financial success!

Retirement Planning Calculator

Updated 2H2015

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Flat broke says

    I believe you can use the 72t on a portion of your IRA assets. So in your example you could 72t 200k and let the rest grow. My only challenge is my employer 401k has a nice fixed rate fund which is getting more tempting to put my money in as I age. Right now it is 5%. So I’m pushing more into my Roth IRA hoping to leave my employer 401k alone. I know this is atypical for most, but I have better funds in my 401k than a typical investor can get (signal shares from vanguard).

    If needed. I could also withdrawal my Roth contributions without any rule to get access to those funds and avoid the 72t.

    • says

      I think you are right. Also, if I was presented with a risk-free, or very low risk 5% returning fund, I’d probably dump at least half my equity assets in there since the 10-year yield is under 2%.

      • Tenser says

        Sam Great site. I have just about caught up on all 151 pages of articles and it has been quite interesting. Sorry for the late post on this topic.

        Once you start Rule 72(t)(2)(A)(iv) you can start and stop as long as you meet the required 5 year minimum or 59 1/2 age as the terms are currently laid out, so it may be a good option if some funds are needed, but you don’t want to really impact your savings long term.

        This link to the FAQ on the IRS site helped (yes typical gov’t legalese) when I was trying to sort through the loopholes and pitfalls.

        Additionally with a typical IRA you are required to start Minimum Required Distributions at 70 1/2 per the table in the IRS link below, which depending on your IRA size will definitely start drawing down the balance.

        that may be slightly off topic since 72(t)(2)(A)(iv) after 59 1/2 really doesn’t matter, at that point you ideally would be managing your withdraws to maximize tax advantage, maintain the “nut”, and support your lifestyle needs/planning at that point.

        I have been looking into it a lot myself (I am not an expert by any means) because I have some ER plans, and a larger portion of my retirement savings are locked in IRA type vehicles.

        thanks again for the insights Sam


  2. Dividend Growth Investor says

    This is a very timely article. Thank you for the in-depth write-up Sam. Starting this year I am trying to put away as much as possible in tax-deferred accounts such as 401(k), SEP-IRA in order to minimize the tax bite out of income.

    I did gladly pay the taxes for the first several years however, as I was building up my taxable brokerage accounts. The dividends from these now cover a large portion of my expenses.

    • says

      No problem. Gotta max out the pre-tax retirement accounts. It really starts to add up over time. It was relatively painless to max out my 401(k) after my first year of work, and I wish I could have doubled the contribution during the past 12 years. You’ll be so glad you did 10 years from now!

      • Dividend Growth Investor says

        I accumulated funds in taxable accounts first. It is much easier to max out your 401k when you receive a sizeable amount of dividends that covers 50 -60% of monthly expenses.

        Not sure about where I will be 10 years from now ;-)

  3. says

    I love how there’s always something new to learn in personal finance. There are so many rules and such it’s hard keeping track of them all or even knowing that they exist. Thanks for sharing this one. Definitely helpful for those who are able to retire early!

  4. says

    I would avoid withdrawing at all cost, but that’s just me. If you need money now while you are young, chances are you’ll need more when you’re older. It’s a bad idea to draw down in you 30s or 40s unless you have a mother load of an IRA.

    • says

      Good point. Rule 72(t) is not something I encourage very early on. It’s just nice to know it’s there if needed, and can be implemented to save on taxes depending on your work time tax bracket. Let it compound!

  5. Cinder says

    I am someone who only does a minimum to meet company match in my 401k, and I am going to try to max out my andmy wife’s RothIRA first. I currently make 71k per year pre tax, and am still in the 15% bracket. Once my wife can find a teaching job that would push our combined income into the 25% bracket, we will shift that portion taxed at 25% into my 401k.

    Right now we are focusing on paying off her 30k of student loan debt before we really push the retirement envelope. I would love to get a larger overall portion of our salary into savings/retirement. I know that compared to a lot of people in my area, I do make a “lot of money”, but in the grand scheme of things I know it is a drop in the bucket. Net worth is sitting about 95k right now factoring in the house.

    Once she finds a steady teaching job, we will be able to use her entire income toward saving and investing.

  6. JayCeezy says

    For those finding the subject of interest, here is a website with some remarkable calculators. Click on the ‘Calculators’ tab, fill out the data, then go back to the top and click on the Blue “Calculate” bar at the top of the data (easy to miss). You can get an idea very quickly of what you can withdraw, do “what-if” scenarios involving a spouse or inheritor, and possible penalties.

    A great book that utilizes 72(t) in a Retirement Drawdown scenario is “Buckets of Money” by Ray Lucia. In a nutshell, the main goal is cashflow; minimizing taxes is part of maximizing cashflow. In example, if you retire and are in the 15% bracket while drawing down savings that have already been taxed for living expenses, it does not make sense to avoid taxes now if the untaxed savings will later be drawn down in the 33% bracket, and cause 85% of your Social Security to be taxed. FS, this is a good problem to have for you.

    • says

      Thanks for the heads up! Will check out the calculator and incorporate it in the post.

      I hope by the time I’m in max withdrawal mode, I’ve set up residency in one of the no income tax states.

  7. says

    Thanks for the shout out, Sam!

    We’re definitely considering using the 72(t) as a portion of funding early retirement, and have fiddled with the idea of turning it on at 35 or 40 with varying results. One of the reasons we’re pretty okay with this idea is that though we’d be giving up some of the compounding, the required distributions would still be small enough that a reasonably aggressive portfolio would outperform it. We’ve also got our Roth IRAs which so far we plan on leaving untouched until 59.5+.

    The other thing to keep in mind is that by rolling over into an IRA, even if you don’t take 72(t), most people will come out ahead because of limited investment options that often come with higher fees in their 401Ks. Even if we don’t end up using 72(t), as soon as we stop working for our companies, we’ll be rolling over into a Vanguard IRA where we can get similar funds and investment objectives with significantly lower fees.

    • says

      The lower fees is indeed a blessing, although the 401(k) has been under so much scrutiny now that I’m sure these fees will come down over time.

      I’m just excited about the flexibility to invest in other securities such as these Chinese stocks I mentioned in a previous post. We’ll see what happens!

  8. RORBUS says

    This is very timely for me. I’m 50 and considering retirement. My husband is older, already retired and we have determined we can live on his pension/SS/401(k) and should not have to touch mine for a while. Only concern is IF something was to happen to him before I turn 59.5. (my access to his pension and SS would be cut in 1/2). Knowing that I have the 72(t) to fall back on makes the decision so much easier! Anyone have any additional input? I would love to hear it.

    • David m says

      I do not think your ss would be 1/2 – I think it would be 100% of what he gets, if he died. You would get 1/2 of his amount while he is alive – unless your ss benefit is higher than this – which it likely would be.

      • says

        I think David is right. It would be unreasonable to assume you would get only half before you turn 59.5. I think you get 100% of what he would have got once you turn 59.5.

        Your attitude on Rule 72(t) is exactly what makes me happy. It’s something I can fall back on, AND pay lower taxes in my case in case I really need the money, penalty-free.

  9. says

    Thanks for the information I think a small correction is due

    Acorordinr the the IRS , you will need to make withdrawls for 5 fivers or until you turn 59 1/2

    When do I fulfill my obligation to take substantially equal periodic payments?
    The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.
    If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011.

  10. says

    Excellent article, and as you said, thanks to JayCeezy and MrsPops for pushing the 72t rule on you (probably multiple times)!

    And as always, thank you for the articles that you write.

  11. says

    Let it compound, grow the nut large enough. Then buy a triplex, take an interest only mortgage against the property through a cash out refinance. Make the payment large enough where you will use 401K money to pay part of it. Take out enough to cover part of the mortgage, using the interest income as a write off. The rental income is offset with depreciation, you have legally taken out money while pay no tax. Live off and invest the cash out refinance and the rental income while paying no taxes on that money. Rinse and repeat with another property.
    When I get motivated again I will write how the numbers would work, this would work especially well here in Hawaii with the high land prices and the fact you can get $5000+ on a triplex in the right neighborhood

      • says

        Ideally $1 million in 401K and a rental property with a low cost basis due to utilizing depreciation. (Paid down by renters over the years.) Do a 1031 exchange into the triplex, financed with a cash out to unlock the equity.

        Seems like a lot of work but could mean tens of thousands in saved taxes.

  12. GreenGenius says


    Your inclusion of AT&T for dividend got my attention. The yield is actually at 4.8% currently. Looking over their balance sheet, I don’t see how this is sustainable. Can you elaborate on why you think it may be? To me it looks like they are spending issuing a dividend they don’t have the money for. Thanks. I really enjoy your blog.

    • says

      I included AT&T after doing a screen of the top dividend yielding stocks. A dividend yield changes by the day as it depends on the stock price. Going into the dividend payout strategy of AT&T is beyond the scope of this post, and I do not know.

  13. says

    That is certainly a compelling reason but consider this. Many 401k’s will let you withdraw penalty free at the age of 55. I’ve always favored rolling funds into an IRA but the 55 exception actually prompted me to keep my funds from my last employer in the 401 k it was in. I’m happy with the investment options there and am in my early 50’s so it makes sense for me. I guess it really depends on your age and when you think you’ll need the funds!

  14. says

    I had never heard of Rule 72(t), guess you learn something new every day.

    In your position I don’t think I’d tap those funds just yet. Ideally I’d let the “retirement” accounts compound and grow as long as possible and live off of savings and other streams of income until it was absolutely necessary to start drawing on your IRAs.

  15. Eric Shun says

    FS, excellent piece. If I understand correctly, you’re counting on a mutual fund to throw off blended dividends of 2-3%. But those stocks could dive and bringing your principle down.

    Why not purchase a reasonably safe long-term corporate bond paying 3 – 4% and hold until maturity? (Fidelity Corporate Notes program offers these every week as new issue at par from a small selection of decent companies.) This week I purchased a 10-year Morgan Stanley bond at par paying a fixed 3.2%

    Or, why not purchase a long-term CD (of course, not at today’s rates but if rates are acceptable when you’re ready)?

  16. angela says

    I thought you could use the SEPP rule on your 401k as well. Then you wouldn’t have to convert to an IRA and pay the higher taxes while still working. Am I wrong about this?

  17. Sandy says

    If I started a 72(t) April 2013 and have received installments since then, I turned 59.5 in June 2015, Can I continue to receive installments from the 72(t) and also draw a lump sum from my IRA without penalty?



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