Getting To Age 59 1/2 for High-Net-Worth Retirees: Utilizing SEPP (72t)and The Rule of 55 for Pre-Tax Accounts
Episode 27
Getting To Age 59 1/2 for High-Net-Worth Retirees: Utilizing SEPP (72t)and The Rule of 55 for Pre-Tax Accounts
Published on March 18th, 2026
Episode Summary
Episode 27 of Retirement Tax Matters analyzes technical strategies for high-net-worth retirees who wish to access retirement funds before the standard age of 59 1/2 without incurring the 10% IRS early withdrawal penalty. Garrett and Adam explore the mechanics of IRS Section 72(t), specifically the use of Substantially Equal Periodic Payments (SEPP) to create a multi-year income bridge. The discussion highlights advanced planning techniques such as partitioning IRA funds to maintain portfolio flexibility while satisfying mandatory distribution formulas. Additionally, the episode details the Rule of 55 for employer-sponsored 401(k) and 403(b) plans, emphasizing the critical step of verifying whether a specific plan allows for partial distributions. This conversation provides the technical foundation for early retirees in the $2M–$8M range to determine if these rigid pre-tax account workarounds are a fit for their unique situation.
The Early Retirement Series:
Key Tax Planning Questions
Question 1: How do you partition a $4M IRA for SEPP 72(t) purposes?
This is a sophisticated question that impacts high-net-worth retirees who have spent an entire career saving into their pre-tax 401(k) and now find themselves with enough wealth to consider early retirement before age 59 1/2. For a married individual at age 56 with a $4M IRA, the idea of partitioning your IRA is a strategic move to maintain control. A Substantially Equal Periodic Payment (SEPP) plan, governed by IRS Section 72(t), allows you to access retirement funds early without triggering the 10% early withdrawal penalty. However, the basics of a SEPP plan require you to take a fixed amount of money for either five years or until you reach age 59 1/2, whichever is longer. For a 56-year-old, this means a multi-year commitment to a rigid income stream.
If you apply a SEPP plan to your entire $4M balance, using this Bankrate 72(t) distribution calculator can help identify a potential lack of flexibility. Using a 5% reasonable interest rate and single life expectancy, a 56-year-old would be forced to withdraw approximately $266,000 per year using the fixed amortization method. Even if you chose the RMD method for a lower fixed distribution of approximately $139,000, you are still forced to take those distributions regardless of how the market is performing. If this 56-year-old partitioned their $4M into two separate accounts before the distributions begin—perhaps $3M in a standard IRA and $1M in a 72(t) IRA—you right-size the forced income. According to the same calculator, that $1M partition would generate a more manageable $66,000 annual distribution using the fixed amortization method ($37k for the RMD method), leaving the remaining $3M untouched and flexible.
There are significant risks to this strategy that every high-net-worth retiree must respect. If you miss a single distribution or take the wrong amount, the IRS will retroactively apply the 10% penalty to all prior distributions in the series, plus interest. Because of this rigidity, the partitioning strategy is an excellent technical tool, but it is often a plan B in our office. If you have other assets, such as a taxable brokerage account, utilizing those funds for your early retirement bridge is usually preferable. This preserves your IRA (and avoids fixed payment requirements) and protects the future tax-free potential of your Roth accounts for your beneficiaries.
Question 2: Should I rollover my 401(k) or use the Rule of 55 for my early retirement?
While the Substantially Equal Periodic Payment (SEPP) 72(t) method provides a way to access IRA funds, the Rule of 55 is a much more friendly distribution method for high-net-worth retirees who leave their employer after age 55. If you separate from service in or after the year you turn 55, the IRS allows you to avoid the 10% early withdrawal penalty from your 401(k) or 403(b) plan. For a retiree with a large pre-tax 401k balance, this might provide a viable bridge of funds to live on without the rigid, multi-year contractual commitment required by a SEPP 72(t) distribution plan.
The most common mistake we see for early retirees is the standard advice from an advisor or co-worker to immediately roll over a 401(k) into a Traditional IRA upon retirement. Once your funds are rolled into an IRA, you lose the Rule of 55 forever. You are then forced to operate under the much more restrictive SEPP 72(t) rules if you need income before age 59 1/2. If you still have several years before that milestone, keeping your funds in your employer-sponsored plan can be an amazing benefit, providing penalty-free access to your pre-tax wealth when you need it most.
Here are your key takeaways if you are standing at this crossroads:
Be on Alert: Sometimes advisors can either not know about the Rule of 55 or they overlook it in the excitement to manage your assets. Either way, you need to slow down before you roll over your 401(k) and end up having to utilize those restrictive 72(t) distribution rules.
Call Your 401(k) Provider: If you think you are eligible for the Rule of 55 and you need this to make your early retirement happen, you need to call your HR department or 401(k) administrator today. You need to ask them if your specific plan allows for partial distributions. Some plans may tell you your only options are to keep everything in the plan or distribute the whole thing, meaning the more restrictive 72(t) might end up applying.
Watch the Roth Trap: If you have a Roth 401(k) component, ask how they treat a partial distribution. While the Rule of 55 waives the 10% penalty, any distributions from the earnings portion of a Roth 401(k) before age 59 1/2 are still subject to ordinary income tax.
Consider a Hybrid Approach: Depending on how that phone call goes, you may be able to keep enough in your 401(k) at your employer to help you bridge the gap to age 59 1/2 and roll the rest over to an IRA to access better investment options.
Question 3: As an executive of a large company, my spouse and I are in the fortunate position of being 55 and have saved more than we need and are considering early retirement. We have a $3M Pre-Tax 401(k), a $3M Joint Brokerage Account, and a $500K Roth IRA. While we know we have enough to live on even if we make tax mistakes, we want to be prudent. Should we be considering technical workarounds like SEPP 72(t) or the Rule of 55 to use our IRA for income over the next 4 1/2 years, or is there a better way to bridge the gap to age 59 1/2?
One common characteristic of executives and business owners who have garnered high incomes over a long career is that they eventually hit a limit on what they can contribute to their pre-tax 401(k). They end up needing additional investing space, so they start saving into a taxable brokerage account. It’s not uncommon for these brokerage accounts to eventually eclipse what is in the 401(k). While some retirees think the brokerage account isn't as good as a pre-tax 401(k) or a Roth IRA, as a financial planner, I think it is actually one of the best assets a high-net-worth retiree can have, especially if early retirement is on their mind.
In general, because of the restrictive rules of a SEPP 72(t) distribution plan, the idea is often less appealing when other assets are available. While it sounds creative, the fear of messing up a fixed distribution, which would necessitate a payback of all 10% early distribution penalties plus interest. It also means you may be forced to take money out in a down market whether you want to or not.
When it comes to this person’s $500K Roth IRA, that is another interesting source of income, as they can get to their contributions tax-free and avoid the 10% penalty. But as a financial planner, unless the circumstances are unusual, I view those Roth funds as one of their best assets. The chances of a couple with these type of resources running out of money is very small. If you have beneficiaries you want to leave an inheritance to one day, having a Roth IRA that can grow tax-free for another 10 years after your passing makes that money too valuable to take out during this bridge period.
That leaves their $3M brokerage account, which is ideal for this scenario. If this couple has held these investments over a long period, they likely have appreciated stocks that qualify for long-term capital gain rates (between 15%-23.8%) instead of their higher ordinary income tax bracket. The years between age 55 and your 70s, when Social Security and RMDs begin, represent a Golden Window of financial planning opportunity. It could be a good idea for this couple to live off capital gains to meet their income needs while considering strategic Roth Conversions to fill up to the top of the 22% or 24% marginal income tax bracket. For a high-income couple, the flexibility of the brokerage account simply provides opportunities that the rigid 401(k) workarounds will have a hard time matching.
Once you reach age 59 1/2, your income options will expand. But you may still find yourself enjoying the benefits of income generation from your brokerage account until RMDs kick-in.
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional. How are we doing this morning, Garrett?
Garrett: Doing good. We're back. Ready to roll? We are back and ready to rock and roll. East Tennessee is funny. I feel like we talk about the weather a lot. We were talking last night, and somebody said, "Man, I love that it's springtime." And I said, "There's probably one more good snow left in us." And they wake up this morning, it's in the thirties. I've been looking at our thumbnails and I'm always in a sweatshirt, so I'm ready to be back in just normal summer gear.
Garrett: I've got the springtime yellow on today. A lot of times we do these podcasts, and I do a little prep session at Starbucks or a coffee shop before we come in. But this morning, I wasn't expecting sleet. I walked out into the parking lot and I thought, "Man, was that ice?" And sure enough, I got here to the office and they said it was icing this morning. So, Tennessee has volatile weather, but here we are in the middle of it. We're still working through the early retirement series. We talked about health insurance, talked about Social Security, and some different key components to building out your game plan if you're thinking about going that route.
Adam: And this week, to continue that idea, we've had some people in the comments on Instagram, YouTube, and different places point out some different things. It's funny running a podcast where you're talking about financial topics because there's about a million different ways you can do a lot of different things. A lot of them are influenced by your biases, your personal experiences, and your personal situation. It's not surprising to me that we have a lot of people saying, "Hey, well what about this?" Or, "Hey, did you guys miss this? Or did you think about this?" And so we wanted to take some time this week to specifically hone in on how to bridge the gap and access some retirement funds before age 59 and a half. We had some astute listeners say, "Hey, you actually can do this, or you actually can do that." So we thought it would be helpful to make an episode, or maybe a couple parts, touching on the different strategies that you might approach, look into, or talk through with your financial advisor if your game plan is to call it quits before 59 and a half. Give me some thoughts on what you are thinking through if somebody says, "Hey, I'm 55, I want to call it quits." They can access funds in an IRA. How do you counsel people? Does it depend on the situation?
Garrett: I love this answer and I hate it, but a good financial planner is always going to say, "It kind of depends." And the reason we say that is because life goals, financial goals, and personal goals all mix. So you're going to have different answers for different people. But when it comes to this idea of generating income early, a short format blip from me on Instagram or Facebook that says brokerage accounts are better and it's difficult to pull money from an IRA lacks context. It lacks nuance. And so these conversations are really good to have at a deeper level. Specifically, what we can talk about today is that area of generating income from a traditional IRA between the ages of 55 and 60. When we work with this demographic of high-net-worth retirees—somewhere in that $2 million to $8 million category—early retirement is on their mind. Waiting until 65, if they've accumulated a sizable IRA, Roth, or brokerage account, they just begin thinking, "Why am I still working? Why am I still doing this job that's kind of grinding?" I think it's really important to talk at a deeper level about how to get to early retirement. I know we've talked about Social Security and health insurance, but this is the third big wheel of early retirement: how do I actually live on the money that I've saved when there are penalties associated with an IRA? I think we had a comment there that maybe you could share, and then we'll go from there.
Adam: Yeah, so we had a listener on Instagram say you can take IRA money out earlier than 59 and a half if you do a SEPP. SEPP stands for Substantially Equal Periodic Payments. Give me some insight into this. I personally haven't worked with anybody that's done one of these. If it's new on my plate, it's probably new to a lot of other people as well. So let's dive into that, into Rule 72(t) and kind of what that means. I think a lot of people have heard of that one, but maybe don't know the professional name for it.
Garrett: So let's start from 30,000 feet. The government tries its very best to incentivize good behavior. When it comes to retirement planning and having people prepare for their retirement at an economic level, they're trying to incentivize people to invest and save for the long term. With a traditional IRA or a 401(k), you've been shoveling money into that retirement account for a long term, and you've been given a tax deduction. The IRS gives you a tax deduction, which is a good thing, so that money can grow larger and incentivize compounding growth. But they say, if you don't let it compound for a long time, then you're going to get penalized. And so that's where this 10% early withdrawal penalty comes from. As a financial planner, this idea of age 59 and a half is really important. We bring it up a lot because a lot of IRS rules and laws are set up so they don't want you to rob your retirement savings before age 59 and a half. If you want to retire at 55 and theoretically you look at your accounts online and there's plenty of money for you to live off, you start to come up against the fact that the IRS is going to charge you a 10% early withdrawal penalty on the money that you pull out of your 401(k) or your traditional IRA. This conversation today is about how we bridge that gap from an early retirement to age 59 and a half. One of those tools is Substantially Equal Periodic Payments. The section of the IRS law that talks about this is 72(t). Substantially Equal Periodic Payments—I call them SEPPs—are the workaround to this 10% early withdrawal penalty. As an aside, there's this SEPP rule, and there's also one called the Rule of 55 for your 401(k) plan. What I am describing now is for when you need to pull money out of an Individual Retirement Account, a pre-tax IRA. It is a little bit complicated, but it's not above anyone out there that's listening. It is a viable path. But I would also say there's a difference between simple and safe. If you misstep—it's kind of like a missed RMD where the IRS can charge a punitive penalty. With Substantially Equal Periodic Payments, if you mess up, they can take all of those benefit dollars that didn't get the 10% early withdrawal penalty and they can retroactively go back and penalize you for all of it. It's something that you want to be very careful about. You want to have somebody qualified review your plan.
Adam: Thank you for clearing that up. I think I threw you for a loop with the name earlier, but let's get down to how a Substantially Equal Periodic Payment works.
Garrett: The formula starts with this: you have to stick to this Substantially Equal Periodic Payment for the greater of five years, or until you turn 59 and a half, whichever is longer. There are three different ways that Substantially Equal Periodic Payments can be set up: a required minimum distribution method, a fixed amortization method, and a fixed annuitization method. In each one of those three methods, there is a formula associated with the amount that you are forced to take out from your IRA each of those five years, or all the way up until age 59 and a half. If you don't adhere to that fixed amount, you end up getting charged that 10% early withdrawal penalty. I went to a website this morning, Bankrate, and they had a 72(t) distribution calculator. If somebody had a $1 million IRA, they were age 55, and they used a single life expectancy—and 5% is a good interest rate number—a $1 million IRA would have approximately a $65,000 per year distribution that you would have to make from your IRA. You still get taxed on that money, but the big benefit is that you don't get the 10% additional penalty. The challenge is that it really doesn't matter if the market goes up or down during that five-year or greater term. If the market dropped 20% or 40% and you had a $60,000 distribution you had to make, you have to pull that out. There is a one-time ability where you could change from one method, like the annuitization method, down to the required minimum distribution method. But you don't have as much control when you sign up for a SEPP payment plan like this. Usually, it ends up being, "Ooh, I don't like to hand over control. Are there any other ways?" As a CFP® professional, one of the advanced strategies that we have with a Substantially Equal Periodic Payment is you can partition your IRA funds. Let's say you're a high-net-worth retiree and you've got a $4 million IRA. You probably don't want to set up a SEPP payment plan on the full $4 million IRA. Instead, you could break that apart. Maybe you just want $60,000, and you put a $1 million IRA into this SEPP payment plan and then leave the $3 million to be flexible. You don't have to contract your entire IRA. It is a long-winded technical answer, and you have to be careful that you don't run afoul of the rules.
Adam: It's funny, I feel like almost every episode turns into a psychological breakdown. Some people say, "Oh, the bad