BiggerPockets Money Podcast

Episode: How to Access Retirement Funds Early Using the 72(t) Strategy
Release Date: June 13, 2025
Host: Mindy Jensen and Scott Trench
Guest: John Bowens, Director and Head of Education and Investor Success at Equity Trust

Introduction to the 72(t) Strategy

The episode kicks off with Mindy Jensen introducing the concept of the 72(t) strategy, a legal method to access funds from 401(k) and IRA accounts before reaching the age of 59½ without incurring the standard 10% early withdrawal penalty. Mindy emphasizes the depth of discussion planned, suggesting listeners have a notebook ready for detailed note-taking (00:00).

Mindy Jensen:
"What if I told you there's a completely legal way to access your 401k and IRA money before age 59 and a half without paying that brutal 10% early withdrawal penalty?" (00:00)

Understanding 72(t): Tax Code Fundamentals

John Bowens delves into the origins of the 72(t) rule, referencing Section 72T of the Internal Revenue Code. He explains that while early withdrawals from retirement accounts typically attract a 10% penalty, certain exceptions, including the substantially equal periodic payments (SEPP), allow for penalty-free access under specific conditions.

John Bowens:
"Under 72T, you'll learn that when you distribute money from an IRA prior to the age of 59 and a half... you can be exempt from the 10% premature withdrawal penalty." (01:54)

The Three Methods of 72(t) Distributions

John outlines the three methods available for calculating SEPP:

1. Required Minimum Distribution (RMD) Method:
   Based on life expectancy, this method recalculates the distribution amount annually.

2. Fixed Amortization Method:
   Similar to loan amortization, it offers a fixed withdrawal amount based on an interest rate and life expectancy.

3. Fixed Annuitization Method:
   Uses IRS-published mortality tables to determine fixed annual distributions.

John Bowens:
"The IRS allows us to choose from three different distribution methods: RMD, fixed amortization, and fixed annuitization." (03:28)

Comparative Analysis of Distribution Methods

The discussion compares the methods, highlighting that the RMD method typically results in smaller annual withdrawals compared to the fixed amortization and annuitization methods. John provides numerical examples, illustrating how a 50-year-old could withdraw approximately $14,000 annually using the RMD method versus up to $30,000 with the amortization method.

John Bowens:
"The amortization method gives you about double what the RMD method offers, but you have to commit to that fixed withdrawal amount for the duration of the strategy." (06:49)

Flexibility and Risks of Changing Methods

Mindy inquires about the flexibility of switching distribution methods, to which John explains that a one-time switch from amortization or annuitization to the RMD method is permitted under IRS guidelines. He cautions that failing to adhere to the SEPP schedule can result in retroactive penalties.

John Bowens:
"If you fail to maintain the SEPP distributions, the IRS will retroactively impose the 10% penalty on all distributions taken." (26:28)

Investment Strategies Within 72(t) IRAs

The conversation shifts to suitable investments for 72(t) IRAs. John advocates for conservative portfolios to mitigate the risk of insufficient funds due to market downturns. He also discusses alternative investments like real estate and private equity, emphasizing the importance of liquidity to meet distribution requirements.

John Bowens:
"If you're investing in alternative assets like real estate or cryptocurrency, you need to ensure you have sufficient liquidity to satisfy your SEPP distributions annually." (09:46)

Roth IRAs vs. 72(t) Distributions

Scott Trench introduces the concept of Roth IRAs as an alternative to traditional IRAs accessed via 72(t) distributions. They discuss the benefits of Roth IRAs, such as tax-free growth and the absence of Required Minimum Distributions (RMDs), contrasting them with traditional IRAs' tax-deferred status and mandatory withdrawals.

Scott Trench:
"The Roth IRA is the holy grail of retirement planning because it grows tax-free and isn’t subject to RMDs during your lifetime." (36:44)

Roth Conversion Strategies

John elaborates on converting traditional IRA funds to Roth IRAs, explaining how this process involves paying taxes on the converted amount but allows for tax-free growth thereafter. He highlights strategies like staged conversions to manage tax liabilities effectively.

John Bowens:
"Converting from a traditional IRA to a Roth IRA involves paying taxes on the converted amount now, but it sets you up for tax-free growth in the future." (52:52)

Practical Steps to Implement 72(t)

Towards the episode's conclusion, John provides actionable steps for listeners interested in setting up SEPP distributions. He advises consulting with a tax advisor, using IRS resources for calculations, and ensuring all documentation is meticulously maintained to comply with IRS requirements.

John Bowens:
"If you have a tax advisor, work with them to set up your 72(t) distributions. Ensure you document everything to comply with IRS rules and avoid penalties." (53:36)

Final Takeaways and Future Topics

Mindy and Scott wrap up the episode by summarizing the 72(t) strategy's benefits and complexities. They tease future discussions on Roth IRA strategies, encouraging listeners to stay tuned for deeper dives into retirement planning.

Mindy Jensen:
"We’re not doing anything wrong. We’re just using exceptions to the rules to optimize our retirement strategies." (58:59)

Scott Trench:
"The 72(t) strategy is a powerful tool, especially for those in their late 40s and early 50s, but it’s just one part of a broader retirement planning arsenal." (61:16)

Key Insights and Conclusions

• 72(t) as a Viable Early Withdrawal Strategy:
  The 72(t) strategy allows individuals to access retirement funds before 59½ without penalties by adhering to SEPP schedules.

• Method Selection:
  Choosing between RMD, amortization, and annuitization methods depends on individual financial needs and risk tolerance. The RMD method offers flexibility and adjusts to portfolio changes, while amortization and annuitization provide higher fixed withdrawals.

• Investment Considerations:
  Conservative investment portfolios are advisable within 72(t) IRAs to ensure consistent distributions. Alternative investments like real estate can be included but require careful liquidity management.

• Roth IRA Advantages:
  Roth IRAs present an attractive alternative with tax-free growth and no mandatory withdrawals, making them a key component of long-term retirement strategies.

• Tax Planning:
  Converting traditional IRA funds to Roth IRAs can optimize tax liabilities, especially when paired with strategies like backdoor Roth conversions and leveraging passive losses from real estate investments.

• Compliance and Risks:
  Strict adherence to distribution schedules is crucial to avoid hefty penalties. Proper documentation and expert consultation are essential.

• Holistic Retirement Planning:
  The 72(t) strategy should be integrated into a broader retirement plan, considering other income sources, investment types, and future financial goals.

Notable Quotes with Timestamps

• Mindy Jensen (00:00):
  "What if I told you there's a completely legal way to access your 401k and IRA money before age 59 and a half without paying that brutal 10% early withdrawal penalty?"

• John Bowens (01:54):
  "Under 72T, you'll learn that when you distribute money from an IRA prior to the age of 59 and a half... you can be exempt from the 10% premature withdrawal penalty."

• John Bowens (06:49):
  "The amortization method gives you about double what the RMD method offers, but you have to commit to that fixed withdrawal amount for the duration of the strategy."

• John Bowens (26:28):
  "If you fail to maintain the SEPP distributions, the IRS will retroactively impose the 10% penalty on all distributions taken."

• Scott Trench (36:44):
  "The Roth IRA is the holy grail of retirement planning because it grows tax-free and isn’t subject to RMDs during your lifetime."

• John Bowens (52:52):
  "Converting from a traditional IRA to a Roth IRA involves paying taxes on the converted amount now, but it sets you up for tax-free growth in the future."

• John Bowens (53:36):
  "If you have a tax advisor, work with them to set up your 72(t) distributions. Ensure you document everything to comply with IRS rules and avoid penalties."

• Mindy Jensen (58:59):
  "We’re not doing anything wrong. We’re just using exceptions to the rules to optimize our retirement strategies."

• Scott Trench (61:16):
  "The 72(t) strategy is a powerful tool, especially for those in their late 40s and early 50s, but it’s just one part of a broader retirement planning arsenal."

This comprehensive summary encapsulates the essence of the podcast episode, providing listeners and non-listeners alike with a clear understanding of the 72(t) strategy, its applications, benefits, and considerations within the broader context of retirement planning.