Does IRS Rule 72(t) Provide a Way to Take Early 401(k) Withdrawals Without Penalty?

Rule 72(t) allows the owner of a 401(k) or IRA account to take “substantially equal periodic payments” from an account without owing the 10% early withdrawal penalty.

Taking money out of a401(k) or IRA before age 59½ will generally cause someone to owe a 10% early withdrawal penalty. One of the ways this penalty can be avoided, however, is if the participant uses 72(t) distributions.

IRS rule 72(t) is the section of the code that describes early withdrawal penalties, but it also allows “substantially equal periodic payments” to be taken from a 401(k) or IRA without owing the 10% penalty.

The payout rates must be determined using one of three allowable methods, all of which basically use the participant’s life expectancy along with annuity payout rates or Required Minimum Distribution factors off of the entire balance of the account.

You do not have to continue taking distributions until your life expectancy (or joint life expectancy), but only until the longer of 5 years have passed or you have reached age 59 ½. If the payout method is changed before the 72(t) distributions cease, in a way not approved by the IRS, penalties may ensue.

An important caveat is that the owner of a 401(k) account must be separated from service for this 10% exemption to apply. If in-service rollover are allowed in a plan, a participant could conceivably roll funds into a separate IRA before taking 72(t) distributions from it, thus avoiding the 10% penalty.