72(t) SEPP Rules and Annuities: A Producer's Guide

Updated October 2026

Short answer: A 72(t) SEPP plan lets a client under 59½ take substantially equal periodic payments (SEPP) from an IRA or employer plan without the 10% early-withdrawal penalty. Payments are typically set under one of three IRS-accepted methods and must continue for five years or until 59½, whichever is later. Annuities can fund, follow or sit beside a SEPP, but any unplanned change can trigger retroactive penalties.

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What is a 72(t) SEPP?

Section 72(t) of the Internal Revenue Code adds a 10% tax to most retirement account distributions taken before age 59½. One exception is a series of substantially equal periodic payments, or SEPP. If the payments are calculated under an accepted IRS method and left alone for the required period, the 10% additional tax does not apply. Ordinary income tax still does.

Producers usually see 72(t) with early retirees who need income before 59½, especially from IRAs, where the age-55 separation-from-service exception for employer plans doesn't apply.

Key 72(t) terms

• SEPP: Payments made at least annually and calculated under an IRS-accepted method.
• Modification: Any change to the payment series before the required period ends, other than a few permitted exceptions.
• Recapture: When a SEPP is modified, the 10% tax that would have applied to every prior SEPP payment comes due, plus interest.
• Federal mid-term rate: An applicable federal rate the IRS publishes monthly. It sets one of the two limits on the interest rate used in the fixed methods.

The core 72(t) rules producers need to know

• Duration: Payments continue unchanged until the later of five years after the first payment or age 59½. A 50-year-old is locked in until 59½. A 57-year-old is locked in for five full years.
• One permitted switch: A client using a fixed method may switch once to the RMD method without it counting as a modification. Any other method change is a modification.
• Exceptions: Death and disability end the requirement without recapture. Running the account to zero under the method is not a modification either.
• Income tax still applies: 72(t) only removes the 10% additional tax.

The three IRS methods for calculating 72(t) payments

IRS Notice 2022-6 describes three methods the IRS treats as automatically acceptable. Each produces a different payment from the same balance, so method selection is the biggest lever in a 72(t) case.

Method	How the payment is set	Changes each year?	Where it tends to fit
Required minimum distribution (RMD)	Balance divided by a life expectancy factor from the Uniform Lifetime, Single Life or Joint and Last Survivor table	Yes, recalculated annually	Usually the lowest payment; clients who need less income
Fixed amortization	Balance amortized over life expectancy at an interest rate within the Notice 2022-6 limit	No, level payment	Clients who need a larger, predictable amount
Fixed annuitization	Balance divided by an annuity factor built from IRS mortality rates and a permitted interest rate	No, level payment	Clients who need a level payment; compare it against amortization

The Notice 2022-6 interest rate

For the two fixed methods, the interest rate can be any rate up to the greater of 5% or 120% of the federal mid-term rate for either of the two months immediately before payments begin. A higher assumed rate produces a higher payment from the same balance.

Notice 2022-6 governs series that begin on or after January 1, 2023. It also applies when deciding whether distributions from a non-qualified annuity are part of a SEPP under section 72(q).

Modification risk: what breaks a 72(t) plan

If the series is modified before the required period ends, the 10% additional tax applies to distributions in the year of the change, and a recapture tax equal to the 10% that would have applied to all prior SEPP payments comes due, plus interest. A client four years into a plan can face a large bill over one extra withdrawal.

Screen every 72(t) client for these triggers:

• Taking an extra withdrawal or skipping a scheduled payment.
• Adding new money to the SEPP account (investment gains don't count).
• Moving part of the SEPP account to another IRA or plan, including into a new annuity.
• Rolling over a SEPP payment.
• Changing methods, other than the one-time switch to RMD.

Notice 2022-6 specifically names transfers of a portion of the balance. If a client wants to move an entire SEPP account into an annuity, get the client's tax advisor to sign off first and confirm the new contract can pay the exact scheduled amount.

How annuities fit into 72(t) planning

Annuities don't change the 72(t) rules, but they can solve specific problems around them. Treat these as structures to evaluate case by case, not a recommendation for any particular client.

Holding the SEPP account in a fixed or fixed indexed annuity

A client who wants principal protection while taking SEPP payments may hold the SEPP IRA in a fixed or fixed indexed annuity. The critical check is liquidity: the scheduled SEPP amount has to fit within the contract's penalty-free withdrawal provision, or the client pays surrender charges on top of everything else. Some contracts address 72(t) distributions specifically and others don't, so confirm it in writing with the carrier.

Under the fixed methods, the payment is level, so the contract has to support it regardless of index performance.

Immediate annuities and lifetime payments

The statute describes SEPP as payments made at least annually for the life or life expectancy of the client, or the joint lives of the client and a beneficiary. Lifetime payments from an immediate annuity owned inside an IRA can fit that description and never need recalculating. The tradeoff is that the premium is no longer accessible, and whether a specific payout qualifies should be confirmed by the client's tax professional.

For non-qualified money, section 72(q) has its own SEPP exception and a separate exception for payments under an immediate annuity contract.

Deferred income and income riders for the years after the SEPP

A SEPP solves the gap before 59½. It doesn't solve lifetime income. One structure splits the money before the SEPP starts: one IRA sized to produce the needed SEPP payment, and a second IRA placed in a deferred income annuity or an annuity with an income rider timed to begin when the SEPP period ends. The split has to happen before the first payment, because partial transfers afterward are modifications.

Why a 72(t) calculator matters

The fixed methods depend on inputs that are easy to get wrong: the balance and its valuation date, the life expectancy table, the interest rate and the method. Notice 2022-6 treats a balance as reasonable for the fixed methods if it is taken on any date from December 31 of the prior year through the first distribution. Small input differences change the payment, and a series that wasn't calculated under an accepted method may not qualify for the exception at all.

A good calculator shows the payment range across all three methods, saves the inputs and gives the client's CPA a clear record. BetterAnnuityComp.com producers get a 72(t) calculator alongside RMD, RMD and Stretch IRA, and Social Security benefit calculators in their annuity resources.

A practical 72(t) case checklist

1. Confirm age, account type and whether an employer-plan exception applies instead.
2. Size the SEPP account to the income actually needed, and split accounts before the first payment.
3. Run all three methods and document the rate, table and balance date used.
4. Confirm the annuity contract can pay the exact schedule without surrender charges.
5. Have the client's tax advisor review the plan, and calendar the end date.

This article is general education for financial professionals, not tax or legal advice. Clients should confirm 72(t) decisions with a qualified tax professional.

Frequently asked questions

Can BetterAnnuityComp.com beat my current annuity commission?

That is our sole job: no matter your current commission level, if you meet our minimum requirements (solo producers have none), you automatically get higher commission than where you are today. Starting comp is for every producer, including new producers with no experience, and there is no production minimum. If you have strong production to show, we contract you above our starting comp, and established agencies, financial advisors and financial firms, and healthcare agencies can earn above it too. Submit your application, schedule a Zoom and share your current commission levels by carrier. We compare them carrier by carrier and contract you above them, with full back office support, case management, carrier contracting and sales tools included.

What are the three 72(t) methods?

The required minimum distribution (RMD) method, the fixed amortization method and the fixed annuitization method. The RMD method recalculates the payment every year, while the two fixed methods produce a level payment using an interest rate within the IRS Notice 2022-6 limit.

What interest rate can be used for a 72(t) calculation?

Under IRS Notice 2022-6, the fixed methods can use any rate up to the greater of 5% or 120% of the federal mid-term rate for either of the two months before payments begin.

How long must 72(t) payments continue?

Until the later of five years after the first payment or the date the client reaches age 59½. Death or disability ends the requirement without recapture.

Can a 72(t) account be held in an annuity?

Yes. An IRA running a SEPP can be held in an annuity, but the contract must be able to pay the exact scheduled amount without surrender charges, and moving part of an existing SEPP account into a new contract is a modification.

What happens if a 72(t) plan is modified?

The 10% additional tax applies to distributions in the year of the change, plus a recapture tax equal to the 10% that would have applied to earlier SEPP payments, with interest. Ordinary income tax applies either way.

Sources

• IRS — Substantially equal periodic payments
• IRS — Notice 2022-6, Determination of substantially equal periodic payments
• IRS — Retirement topics: Exceptions to tax on early distributions
• Cornell Law School LII — 26 U.S. Code § 72

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