72(t) SoSEPP: IRS-Approved Strategies for Penalty-Free Early Retirement Income
Accessing retirement funds before age 59½ is usually expensive. The IRS generally imposes a 10% early withdrawal penalty on distributions taken too soon. However, for individuals who need income before traditional retirement age, the tax code provides a narrow — but powerful — exception in Rule 72(t)’s Series of Substantially Equal Periodic Payments (SoSEPPs).
In 2022, the IRS released Notice 2022-6, which modernized and clarified the rules governing SEPPs. This guide explains how SEPPs work, who qualifies, how payments are calculated, and what mistakes to avoid. But first let’s discuss why this IRS approved strategy can be helpful.
The 10% Early Distribution Tax
Under Internal Revenue Code Section 72(t), a taxpayer who takes distributions before age 59½ generally owes an additional 10% tax, on top of ordinary income taxes, on the portion of the distribution included in gross income.
This tax applies to distributions from:
401(k) Employer sponsored plans
403(a) annuity plans
403(b) annuity contracts
Traditional IRAs
Individual retirement annuities under Section 408(b)
Fortunately, Section 72(t) also outlines specific exceptions — one of the most common being a Series of Substantially Equal Periodic Payments.
What Is a Series of Substantially Equal Periodic Payment (SoSEPP)?
A SEPP (sometimes called a “72(t) distribution” or “SoSEPP”) allows taxpayers to take penalty-free early withdrawals if distributions are taken as a series of substantially equal payments. These payments must be taken at least annually, however the taxpayer can structure the SoSEPP as monthly or quarterly payments, so long as the required distribution is met for the year. These payments are based on the taxpayer’s life expectancy (or joint life expectancy with a beneficiary), and must continue for the longer of: Five years, or until the taxpayer reaches age 59½
If structured correctly, SoEPPs eliminate the 10% penalty — but the rules are extremely strict, and one miss-step can cost you thousands in retroactive tax penalties.
Do I Qualify For a 72(t) Distribution:
To qualify under Section 72(t)(2)(A)(iv), the following conditions must be met:
Employer plans require separation from service
For 401(k), 403(a), and 403(b) plans, the taxpayer must have separated from the employer sponsoring the plan before payments begin.
(This does not apply to IRAs.)No additional contributions or withdrawals
Once a SEPP begins, the taxpayer:Cannot add money to the account
Cannot take extra distributions outside the SoSEPP
(Investment gains and losses are allowed.)One SEPP per account per year
Each account can have only one SEPP in effect during a year.No modifications before the required period ends
The SoSEPP must continue unchanged until the later of:Five years from the first payment, or
Age 59½
*Exceptions apply only for death, disability, or certain public safety officer distributions.*
Failure to follow these rules triggers severe tax consequences.
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IRS-Approved SEPP Calculation Methods
Notice 2022-6 confirms three IRS-approved methods that are automatically deemed compliant:
1. Required Minimum Distribution (RMD) Method
Payment recalculated each year
Based on current account balance and life expectancy
Payments fluctuate annually
Lowest risk of account depletion
Most flexible over time
2. Fixed Amortization Method
Payment calculated once and remains fixed
Uses life expectancy and an IRS-approved interest rate
Typically produces higher income than the RMD method
3. Fixed Annuitization Method
Uses mortality tables and interest rates
Produces a fixed annual payment
Most complex calculation
Interest Rate Rules for Amortization and Annuitization Method
For the fixed amortization and fixed annuitization methods, the selected interest rate must not exceed the greater of:
5%, or
120% of the federal mid-term rate published by the IRS for either of the two months preceding the first payment
This rule gives taxpayers more flexibility in higher-rate environments compared to older guidance.
Life Expectancy Tables: Which Ones Apply?
Depending on when a SoSEPP begins and which guidance applies, different tables may be used.
Under Notice 2022-6:
This is the most commonly used table and applies to most account owners.
Applicable for:
Unmarried owners
Married owners whose spouse is not the sole beneficiary
Married owners whose spouse is less than 10 years younger than them.
This table is generally used by beneficiaries who inherit an account, not the original owner establishing a SoSEPP for themselves.
Joint and Last Survivor Table (even for non-spouse beneficiaries)
You may use this table only if your spouse is the sole beneficiary of the account and is more than 10 years younger than you.
Important: If a joint beneficiary dies or is removed and no other beneficiary remains, future years must use the Single Life Table.
How Account Balances Are Determined
RMD Method:
Generally based on the account balance as of December 31 of the prior year.Fixed Methods:
Any reasonable valuation method is acceptable, typically:Ending balance from the most recent statement
Adjusted for contributions, forfeitures, or distributions before the SoSEPP begins
*The method chosen dramatically impacts cash flow — and long-term risk.*
Each SoSEPP applies to one account only. You cannot aggregate balances across multiple accounts. However, separate SoSEPPs may be established on separate accounts.
Payment Frequency Flexibility
Taxpayers may take SEPP payments:
Annually
Quarterly
Monthly
As long as the total annual amount equals the required SoSEPP amount. Each SoSEPP must be paid from its original account — amounts cannot be combined or shifted.
What Happens If a SEPP Is Modified?
A modification occurs if the taxpayer takes more or less than the required amount (outside permitted exceptions).
The consequences are severe:
The 10% penalty applies to all distributions in the year of modification.
A recapture tax applies — retroactively imposing the 10% penalty on all prior SEPP distributions, plus interest.
Once broken, the original SoSEPP is permanently invalid.
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One-Time Allowed Method Change
Notice 2022-6 allows one — and only one — method change:
From fixed amortization or fixed annuitization ➡️ To the RMD method
This change:
Is not considered a modification
Can be done in any later year
Must remain RMD going forward
Any other change triggers penalties.
What If the Account Is Fully Depleted?
If a SoSEPP account reaches zero, and the final payment is less than the required annual amount:
No 10% penalty applies
No recapture tax applies
Payments may stop
This is not considered a modification.
When Are SoSEPP Obligations Fully Satisfied?
A SEPP ends only after the later of:
Five years from the first payment, or
The date the taxpayer reaches age 59½
For example:
Starting at age 56 means payments must continue for five full years, even if age 59½ is reached sooner.
Starting at age 52 means payments must continue until age 59½, even if five years have already passed.
Each SoSEPP must independently satisfy this rule.
Final Thoughts: SoSEPPs Are Powerful — and Unforgiving
SoSEPPs can be an effective bridge for early retirees, career changers, or individuals with unique income needs. But they demand precision, discipline, and long-term planning.
A small error — even years later — can result in thousands, or even tens of thousands of dollars in penalties and interest.
Before implementing a SoSEPP strategy, professional guidance is strongly recommended to ensure calculations, account structuring, and ongoing compliance are handled correctly.
If you’d like help evaluating whether a SoSEPP fits into your broader retirement or income strategy, our team is here to help!
Written by Ryan Morrissey
President & Principle Wealth Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast