Section 72(t) lays out exceptions to the 10% early withdrawal penalty for retirement accounts accessed before age 59 and a half. Common exceptions include permanent disability and separating from federal service at 55 or later. SEPP is a structured withdrawal method that also qualifies, and SEPP payments must continue for 5 years or until 59 and a half, whichever is longer. Breaking the SEPP schedule can trigger penalties on everything already withdrawn.
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For federal employees who retire before age 59 and a half, one of the first questions that comes up is how they can access their retirement savings without getting hit with a penalty. Section 72(t) is one of the answers to that.
Section 72(t) is the part of the tax code that deals with taking money out of retirement accounts before age 59 and a half. Normally, pulling money out that early comes with a 10% penalty on top of the regular taxes you'd owe. Section 72(t) lays out the exceptions to that penalty. The ones that come up most often for federal employees are permanent disability, separating from federal service in the year you turn 55 or later, significant unreimbursed medical expenses, and a structured withdrawal approach called Substantially Equal Periodic Payments, or SEPP.
SEPP is the one that gets the most attention because it lets you set up a stream of withdrawals before age 59 and a half without penalty. The catch is that the payments have to follow a specific schedule based on your account balance and life expectancy. Once you start, you have to keep them going for at least 5 years or until you turn 59 and a half, whichever is longer. If you change the amount or stop early, the IRS can go back and apply the 10% penalty to everything you've already taken out.
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