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Early Retirement, the 72T Rule and You

Knowledge is power, and you may quote me on that!

How many times have you read a blog post or heard a Podast or perused a magazine article with this message: “Save for your retiremient. Oh, but if you retire early there’s no way you can spend money from your retirement accounts until the year you reach age 59 1/2. Because if you do, you’ll pay penalties to the government!”

That’s the common wisdom and you know what? It’s not the whole truth. There are ways around that general guideline. Today we’re going to talk about an important exception, available to just about everyone.


First, a little background. The US government wants you to save for your retirement. They want you to save for your retirement so badly that they give you tax incentives to encourage you to do so. They do this In a couple ways:

  • They allow you to deduct contributions to certain sorts of savings plans from your income in the year you make the contribution. Examples of this sort of plan include traditional Individual Retirement Arrangements (IRAs) and 401(k)s. You get to accrue growth in these plans (like interest, dividends and capital gains) until you retire, and pay taxes on the funds — your original contributions and any growth as you withdraw the funds.
  • They allow you to make after-tax contributions to certain sorts of savings plans. Examples of this sort of plan include Roth IRAs and Roth 401(k)s. You get to accrue growth in these plans (like interest, dividends and capital gains) until you retire, and never pay taxes on any growth.

The general rule for all these plans is that if you withdraw money from them before the year in which you turn 59 1/2, you will pay a penalty on the amount you withdrew in addition to any taxes you owe on the withdrawal. But there ARE exceptions.

These exceptions include using the money to pay medical bills, to acquire a first house and to pay for schooling. Other exceptions include if you inherit an IRA, if you become disabled, or if you buy medical insurance while you’re unemployed. Each of these exceptions has regulations surrounding it, and each has fiscal pros and cons. We will talk about some of these exceptions another day.


But a little-known exception to the penalty for early withdrawals goes by the arcane moniker Rule 72(T). Here’s what Investopedia says about Rule 72(t):

Rule 72(t) ... permits penalty-free withdrawals from IRA accounts, provided the owner takes at least five substantially equal periodic payments ... with the amount depending on the owner’s life expectancy ... This rule permits IRA owners to benefit from their retirement savings before retirement age, through early withdrawal, without the otherwise required 10% penalty. The withdrawals are still taxed at the owner’s normal income tax rate [as they would be if the owner withdrew the funds after retirement age.]


So, bottom line, you CAN use your retirement savings before retirement age without paying a penalty on them. There are regulations (of course!) and it is always prudent to consult a tax professional before making a decision about withdrawing retirement funds. In addition, be certain to ascertain whether your state follows the same rules as the IRS.

Here are some useful IRS resources that address this issue:

Publication 590-b: Withdrawals from Individual Retirement Arrangements

Retirement Topics - Exceptions to Tax on Early Distributions

Internal Revenue Code Section 72

Dorothy is a retired middle-manager who worked for a Fortune 20 company for 30+ years. She retired in 2010 at age 54. She’s not a personal finance professional, and she doesn’t play one on TV. She reminds you never to take financial advice from someone you don’t know.

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