72(t) Articles

Does a Retirement Distribution Count as Income? Understanding 72(t) Distributions

When planning for retirement, it’s crucial to understand how your retirement distributions will be taxed. One common question that arises is, “Does a retirement distribution count as income?” The answer is not as straightforward as you might think, and it largely depends on the type of retirement account you have and how you withdraw your funds. In this blog post, we’ll explore this topic in detail and provide guidance on how to set up a 72(t) distribution.

Understanding Retirement Distributions

Retirement distributions are the funds you withdraw from your retirement savings accounts like a 401(k) or an Individual Retirement Account (IRA). These withdrawals can be either regular distributions or early distributions depending on when you start taking them.

Regular distributions typically begin after age 59½, while early distributions occur before this age. Early distributions often come with additional taxes and penalties unless they meet specific exceptions, one of which is the 72(t) distribution.

So, do these retirement distributions count as income? The short answer is yes. However, the tax implications vary based on the type of account and the nature of the distribution.

Taxation of Retirement Distributions

Traditional IRA and 401(k) accounts are funded with pre-tax dollars. This means that when you withdraw funds from these accounts during retirement, those withdrawals are treated as ordinary income and subject to federal income tax.

On the other hand, Roth IRA and Roth 401(k) accounts are funded with after-tax dollars. Therefore, qualified withdrawals from these accounts are generally tax-free since taxes were paid upfront.

However, if you decide to take early withdrawals from your retirement account before reaching age 59½ without meeting any exceptions, not only will these withdrawals be subject to regular income tax but also an additional 10% penalty tax.

Understanding 72(t) Distributions

One way to avoid the early withdrawal penalty is by setting up a 72(t) distribution. The 72(t) rule, also known as the Substantially Equal Periodic Payment (SEPP) rule, allows you to take early withdrawals from your retirement account without the 10% penalty, provided these withdrawals are part of a series of substantially equal periodic payments.

These payments must occur at least once a year and continue for five years or until you reach age 59½, whichever comes later. The amount of each payment is calculated based on different factors including  your life expectancy or the joint life expectancy of you and your beneficiary. 

How to Set Up a 72(t) Distribution

Setting up a 72(t) distribution can be complex and requires careful planning. Here’s a basic step-by-step guide on how to set up a 72(t) distribution:

1. Determine Your Need: Before setting up a 72(t) distribution, ensure that you need the income and are willing to commit to the SEPP rules which are laid out by the Internal Revenue Service(IRS).

2. Calculate Your Payment: Use one of the three IRS-approved methods – Required Minimum Distribution Method, Fixed Amortization Method, or Fixed Annuitization Method – to calculate your annual payment.

3. Initiate Your Distribution: Contact your retirement account custodian to initiate your SEPP program. Ensure they understand that these are 72(t) distributions to avoid any penalties.Confirm that the IRA custodian is 72(t)-friendly (and will properly code the distributions)

4. Document Everything: Keep detailed records of all transactions related to your SEPP program in case of any IRS inquiries.

5. Review Annually: Review your plan annually with a tax professional or your financial advisor  to ensure ongoing compliance with IRS rules.


While retirement distributions do count as income for tax purposes, understanding how different types of distributions are taxed can help you plan effectively for retirement and potentially save on taxes. If you’re considering taking early withdrawals from your retirement account, setting up a 72(t) distribution could be an option worth exploring. However, due to its complexity and potential consequences if not properly implemented, it’s advisable to consult with a financial advisor or tax professional before proceeding.

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