Understanding 72(t) SoSEPP Distributions

For many investors, tapping retirement funds before age 59½ normally means a 10% early withdrawal penalty. But the IRS provides us with an exception: Sequence Of Substantially Equal Periodic Payments (SoSEPPs) under IRC §72(t). If you follow the rules carefully, you can set up penalty-free withdrawals before age 59½.

This post explains who can use SoSEPP, how long it must last, the one-time switch option, and the three approved calculation methods along with the details of tables, rates, and limits.

Note: as of this blog publication date all online SoSEPP calculators that we looked at provide wrong distribution amounts we suspect because they were not updated with the latest post 2023 IRS data ⁽¹⁾.

For accurate results, we recommend to run your scenario through our SoSEPP calculator.

Who Can Trigger a SoSEPP?

Any IRA owner can establish a SoSEPP — there is no age restriction.
However, SoSEPPs are only useful if started before age 59½, since that’s when early withdrawals normally trigger a 10% penalty.
Starting a SoSEPP after 59½ is possible, but it usually doesn’t make sense because you’d be voluntarily locking yourself into restrictions you don’t need.
Employer retirement plans (401(k), 403(b), etc.) may also qualify, but only if you’ve separated from service and the plan allows.
Beneficiaries of inherited accounts cannot start a SoSEPP as they are subject to the inherited RMD rules instead.

How Long Must a SoSEPP Last?

Once you start, you must continue the withdrawal series for the longer of:

Five full years,
or
Until age 59½.

Example: If you start at age 57, you must continue until age 62 (5 years). If you start at age 50, you must continue until 59½ (9½ years).

Breaking the series early (modifying the amount or stopping payments) or making additional contributions into the account will trigger a retroactive 10% penalty on all withdrawals from the beginning of the plan and the afferent tax interest and penalties.

The One-Time Switch

The IRS allows a single, irrevocable switch from either the amortization or annuitization method to the RMD method per SoSEPP plan.

Why? Because the RMD method generally produces smaller required payments over time, which can reduce financial strain.
Once you switch, you must stick with the RMD method until the SoSEPP plan ends.

The Three Methods

There are three IRS-approved ways to calculate your SoSEPP payments, those are not the only methods though.

1. Required Minimum Distribution (RMD) Method

If you are using the RMD method for a SoSEPP, the annual payment is always based on:

“Your current account balance” = the latest IRS-accepted year-end value (typically December 31 of the prior year, but could be any date up to and including the distribution date).
The life expectancy factors in the IRS’s current RMD tables.

Life Expectancy Tables:

Married Filing Jointly (MFJ):
- If spouse is < 10 years younger (no age gap)→ use either Uniform Lifetime Table or Single Life Table for a higher withdrawal amount.
- If spouse is ≥ 10 years younger (age gap)→ use the Joint Life and Last Survivor Table. BUT if younger spouse dies → you may switch to the Single Life Table.
All other filing statuses → use Uniform Lifetime Table or Single Life Table.

Rate limitation: The RMD method does not use an interest rate cap so rate limitations are not applicable.

NOTE: In the past when the government modified the RMD tables ⁽²⁾. you had the option to switch to the new tables without being subject to a retroactive 10% penalty.

2. Amortization Method

Treats your IRA as a loan amortized over your life expectancy.
Produces a fixed annual payment to be distributed for each year of the plan life.

Life Expectancy Tables: Same table rules as RMD (MFJ with age-gap rules, or Uniform or Single RMD tables for the other statuses).

Maximum Applicable Interest Rate: payments may be based on an assumed interest rate, key points from the IRS guidance:

take the federal mid-term Applicable Federal Rates (AFRs) for either of the two months before the SoSEPP start month.
Multiply by 120% to get the maximum allowed rate.
Compare that to 5% and use whichever is greater = max applicable rate value.
Any value between max applicable rate and zero is considered reasonable and can be used in calculations.

3. Annuitization Method

Uses an annuity factor based on IRS-approved mortality tables and an interest rate.
Produces a fixed annual payment, like amortization, to be distributed for each year of the plan life.

Mortality Table:

Must use the latest IRS-approved mortality table (currently based on the §417(e)(3) mortality assumptions for defined benefit plans, Publication 1457, see “Table 4 to Paragraph (e)”.

Maximum Applicable Interest Rate:

Same rules apply as for the amortization method.

Choosing the Right Method

Amortization/Annuitization methods: Provide larger, nominal payments – useful if you need larger distributions. Riskier if high inflation or if markets fall because payments are fixed. Use our SoSEPP calculator to determine which one of the two methods provides the highest payment.
RMD method: Lower payments that are adjusted annually, generally smallest distributions. Good for reducing the distribution amounts.
Switch strategy: people can start with amortization/annuitization for higher distributions, then exercise the one-time switch to RMD later if they need to reduce distribution amounts.

Account depletion

If a SoSEPP account runs out of funds before the required life time period ends (the longer of 5 years or age 59½), here’s what happens:

Feature	RMD Method	Amortization/Annuitization
Account depletion	SoSEPP ends naturally	Plan is “still in effect” technically, but no payments required from empty account
Adding funds	New funds require a new SoSEPP plan	New funds require a new SoSEPP plan

If your account depletion is due to modified payments, skipped, or increased amounts improperly, the 10% early withdrawal penalty could still apply retroactively.

Key Takeaways

SoSEPP allows penalty-free withdrawals before 59½, but once started, must continue for 5 years or until 59½, whichever is longer.
Payments can be calculated using RMD, amortization, or annuitization methods.
Tables depend on filing status and spouse’s age gap, with possible changes if the spouse dies.
Interest rate caps apply to amortization and annuitization methods: greater of 120% AFR or 5%.
You may make a one-time switch to the RMD method.

Done correctly, SoSEPPs can bridge the income gap for early retirees especially in scenarios where they do not have sufficient taxable funds to cover expense and taxes until ROTH conversion funds become available, but they’re unforgiving if mishandled. Professional guidance is strongly recommended before starting.

⁽¹⁾↩ Back – IRS reference examples:

Inputs:

Age 50 in first year of distribution (2023)
4% rate chosen for fixed amortization and fixed annuitization methods
Using RMD single life expectancy table

Reference Outputs:

for the RMD method:
- the first year withdrawal rate is 2.7624% (1 / 36.2)
- the second year withdrawal rate is 2.8329% (1 / 35.3)
for the amortization method ⁽³⁾:
- the first year withdrawal rate is 5.2754% ( 1 / 18.9559) where 18.9559 is the computed amortization factor.
for the annuitization method ⁽³⁾:
- the first year withdrawal rate is 5.5076% ( 1 / 18.1568) where 18.1568 is the computed annuity factor.

⁽²⁾↩ Back – The Required Minimum Distribution (RMD) life expectancy tables were last updated in 2022 to reflect increases in overall longevity.

⁽³⁾ the (fist year distribution dollar amount) = (the latest IRS-accepted year-end account value) * (withdrawal rate) and must remain the same in subsequent years.

Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Consult with a qualified financial advisor for personalized guidance.