72(t) Articles

Are 72(t) Distributions Considered Income? Here’s Why You Need an Expert to Calculate 72(t)

Are you considering early retirement, or do you need to tap into your retirement savings before reaching the age of 59.5? If so, you may have come across the term ’72(t) distributions’. This rule allows individuals to withdraw from their retirement accounts without incurring the usual 10% penalty for early withdrawal. But are these 72(t) distributions considered income? And why might you need an expert to calculate 72(t)?

Understanding 72(t) Distributions

Before diving into whether or not these distributions are considered income, it’s essential first to understand what a 72(t) distribution is. The Internal Revenue Service (IRS) imposes a 10% penalty on any withdrawals made from a retirement account before the account holder reaches the age of 59.5. However, Section 72(t) of the Internal Revenue Code provides an exception to this rule.

Under this section, individuals can take substantially equal periodic payments (SEPPs) from their retirement accounts without incurring this pre-age 59.5  penalty. These payments must occur at least once per year and continue for five years or until the account holder reaches age 59.5, whichever is longer.

Are 72(t) Distributions Considered Income?

The short answer is yes; these distributions are considered income and are subject to federal & state (if applicable) income tax. When you make a withdrawal from your retirement account under the regular circumstances (after age 59.5), those funds are also considered taxable income.

However, with a traditional IRA or other pre-tax retirement accounts, contributions were made with pre-tax dollars, meaning taxes were not paid at the time of contribution. Therefore, when withdrawals are made—whether they’re regular withdrawals after age 59.5 or SEPPs under Rule 72(t)—they’re subject to income tax at ordinary income rates.

Why You Need an Expert to Calculate Your 72(t) Distribution

Calculating your SEPP under Rule 72(t) can be complex and requires careful consideration of various factors like your life expectancy and account balance. There are three methods approved by the IRS for calculating SEPPs: Required Minimum Distribution Method, Fixed Amortization Method, and Fixed Annuitization Method.

Each method has its pros and cons and results in different distribution amounts based on interest rates and life expectancy tables used by the IRS. A miscalculation can lead to penalties and tax complications—this is why you need an expert to calculate your Rule-72(t) distribution accurately.

The Consequences of Miscalculations

If there’s a miscalculation in your SEPP amount or if changes are made during the specified period that don’t comply with IRS regulations—like adding or withdrawing funds outside of your calculated SEPP—you could be hit with that dreaded early withdrawal penalty on all amounts withdrawn since the beginning of your SEPP program.

This underscores why it’s crucially important that calculations be done correctly from the start—and why many people choose to work with financial advisors or tax professionals when setting up their Rule-72(t) program.


In conclusion, while Rule-72(t) provides a valuable way for individuals needing access to their retirement funds early without incurring penalties, it comes with its complexities—especially when it comes down to calculating distributions correctly.

Yes, these distributions are indeed considered taxable income just like any other withdrawal from a traditional IRA or other pre-tax retirement accounts would be after age 59½ . And because miscalculations can lead to significant penalties and tax complications down the line—it’s clear why you need the help of  an expert when executing this financial planning strategy.

Remember: Retirement planning isn’t just about saving—it’s also about understanding how those savings will be taxed upon withdrawal so that there aren’t any unpleasant surprises waiting for you down the road! Seek competent professional advice regarding this strategy and proper execution.

A quick phone call will help you determine if this is right for you