IRC 72(t) – A Source of Income Hiding in Plain Sight?

Originally published in the Florida Bar Family Law Section Commentator, Issue No. 3, 2025. Republished here with credit to the original publication.

Introduction

Amid the typical scrutiny of assets, liabilities, and income, Section 72(t) of the Internal Revenue Code1 (commonly referred to as “Rule 72(t)”) is often overlooked as a potential source of income in dissolution of marriage cases. This provision of the Code permits early withdrawals from retirement accounts without incurring the standard 10% penalty, potentially uncovering a source of income that is often overlooked. Florida case law underscores the necessity of considering such distributions, making Rule 72(t) a pivotal factor in reaching a financial resolution in family law cases. In this article, we will explore this often overlooked source of income and examine the key cases that every family law practitioner should be familiar with.

Understanding Retirement Accounts

Understanding Retirement Accounts Before diving into the nuances of Rule 72(t), it is essential for family law practitioners to understand the fundamentals of the retirement accounts they commonly encounter. There are two general types of retirement plans: “pre-tax”2 retirement plans, such as IRAs, 401(k)s, and SEP plans, among others; and “post-tax”3 retirement plans, such as Roth IRAs and Roth 401(k)s.

Pre-Tax Retirement Plan

With pre-tax retirement plans, the account holder generally receives a tax deduction in the year the contribution is made,4 allowing the funds to grow on a tax-deferred basis. At age 59½, the account holder can withdraw these funds without incurring a 10% penalty5; however, such withdrawals are subject to ordinary income tax rates. Beginning at age 73,6 holders of pre-tax retirement plans are required to take minimum distributions,7 which are calculated based on the account balance and the holder’s life expectancy, ensuring the government collects the deferred taxes.

Post-Tax Retirement Plans

Unlike pre-tax plans, an account holder receives no tax deduction for contributions made to a post-tax plan. However, these contributions grow tax-free and can be withdrawn beginning at age 59½ without incurring a 10% penalty. Additionally, unlike pre-tax plans, account holders are not required to take minimum distributions.

Internal Revenue Code (IRC) 72(t)

Rule 72(t) provides an exception to the 10% penalty for early withdrawals from both pre tax and post-tax retirement plans made before age 59½, provided the funds are withdrawn as Substantially Equal Periodic Payments (SEPP).8 These SEPP payments must continue without modification for the greater of five years or until the account holder reaches age 59½.9,10.

Determining Substantially Equal Periodic Payments (SEPP)

There are three methods for calculating SEPP payments from a retirement account, all of which require the use of life expectancy tables:11

• The Required Minimum Distribution (RMD) Method – The annual SEPP payment under the RMD Method is calculated by dividing the account balance for that year by the applicable number from the chosen life expectancy table for that year.12 Under the RMD Method, the annual SEPP payment must be recalculated each year, and this recalculation is not considered a modification. For example, in 2023, if Jim is 49 years old and has an account balance of $1 million, his SEPP under the RMD Method will be $26,954 ($1 million ÷ 37.1 years life expectancy). In 2024, when Jim turns 50, if his account balance grows to $1.1 million, his SEPP for that year will be $30,386 ($1.1 million ÷ 36.2 years life expectancy). This recalculation will occur annually until Jim reaches age 59½, spanning a total of 10½ years.

• The Fixed Amortization Method – The annual payment under the Fixed Amortization Method is calculated by amortizing the account balance over the account holder’s life expectancy, using an interest rate not exceeding the greater of 5% or 120% of the Applicable Federal Rate (AFR) published by the IRS for “either of the two months immediately preceding the month in which the distribution begins.”13 This method is similar to a mortgage amortization schedule, where the fixed payment is determined based on the account balance, selected interest rate, and life expectancy.

  
  

  For example, consider Jim in September 2024. If Jim is 50 years old, has an account balance of $1.1 million, an interest rate of 5.40%,14 and a term of 36.2 years, his annual payment under the Fixed Amortization Method would be $69,800. Jim can withdraw $69,800 annually for the next 9½ years, until he reaches age 59½.

  
  

•  The Fixed Annuitization Method - The annual payment under the Fixed Annuitization Method is the most complex of the SEPP methods but shares many similarities with the Fixed Amortization Method. This method, however, uses an “annuity factor” derived from the IRS annuity tables, which is based on the account holder’s life expectancy and the chosen interest rate. This method is subject to the same maximum percentage as under the Fixed Amortization Method.

If Jim is 50 years old in September 2024 and has an account balance of $1.1 million with an annuity factor of 16.0745861, his annual payment under the Fixed Annuitization Method would be $68,431 ($1,100,000 ÷ 16.0745861). In this example, Jim can withdraw $68,431 annually for the next 9½ years, until he reaches age 59½.

While the examples above illustrate annual distributions, 72(t) distributions can also be taken on a quarterly or monthly basis. It is important to note that a 72(t) distribution can only be applied to a single retirement account. Therefore, account holders often redistribute their assets among accounts before initiating a 72(t) plan.

Bringing it All Together – Family Law Example

Let’s return to the example of Jim. Assume Jim is getting divorced at age 50 and has an annual deficit or financial need of $40,000 ($3,333 monthly). All assume that Jim will receive his $1,100,000 Roth IRA account as part of equitable distribution. Under the Fixed Amortization Method, using an annual interest rate of 2.0%, Jim’s SEPP would be $42,993 per year. Assuming the Roth IRA generates 4.0% in annual dividends and interest, Rule 72(t) allows Jim to withdraw $42,993 annually from his Roth IRA without: (i) incurring the 10% early withdrawal penalty, and (ii) reducing the principal balance of his account.

While the example above demonstrates how Rule 72(t) can effectively offset Jim’s financial need, in practice, the viability of using Rule 72(t) as a source of income varies based on several factors. These include the party’s age, prevailing interest rates, account balance(s) involved, and whether the accounts are pre-tax or post-tax, as well as the magnitude of the need or deficit to be addressed. Conducting a careful and thorough analysis of the specific facts in your case is essential to determine whether Rule 72(t) is a suitable solution. As discussed below, Florida case law has both accepted and rejected the use of Rule 72(t) in certain appellate decisions.

Case Law Analysis

In Niederman v. Niederman, the Fourth District Court of Appeal upheld the imputation of income to the wife from her retirement accounts, distributed as part of equitable distribution, through the use of Rule 72(t). 60 So. 3d 544, 550 (Fla. 4th DCA 2011). The court reasoned those withdrawals under Rule 72(t) provided a viable method for generating income without depleting the principal, as a reasonable rate of return could sustain the wife’s needs over time. Id. This decision highlights the importance of utilizing all available financial resources when determining support obligations, even if it necessitates early access to retirement funds.

At the same time, Florida case law reflects courts are generally reluctant to require the premature depletion of retirement account principal unless the circumstances justify such an approach, ensuring an impecunious spouse receives their equitable portion of the marital estate, while also ensuring these accounts fulfill their intended role as long-term financial safeguards.

In Ritacco v. Ritacco, the Fourth DCA emphasized that the decision to impute income from retirement accounts must consider the practicality of withdrawals. 311 So. 3d 988, 992 (Fla. 4th DCA 2021). While Rule 72(t) offers a mechanism to generate income without incurring early withdrawal penalties, the court noted that it may not always be reasonable or equitable to mandate substantial withdrawals that deplete the account principal. Id. In some cases, the income generated may prove so minimal that it becomes impractical or disproportionately costly. Id.

Practical Considerations for Practitioners

Given the different application of Rule 72(t) in Florida family law cases, highlighting both its potential and limitations as a tool for financial planning in dissolution of marriage proceedings, family law practitioners and retained experts must carefully assess whether Rule 72(t) aligns with their client’s financial circumstances and broader equitable distribution objectives. Key considerations include:

• The client’s age and proximity to retirement;

• Anticipated returns on investment within retirement accounts;

• The feasibility of preserving principal while meeting support obligations; and

• Balancing long-term financial security against short-term needs.

The use of Rule 72(t) in family law cases offers a nuanced yet powerful tool for addressing the financial needs of divorcing parties. As demonstrated in cases like Niederman and Ritacco, Florida courts recognize the potential of early retirement account withdrawals to generate income without depleting principal, provided the approach is reasonable and equitable. At the same time, courts remain cautious about mandating such withdrawals, reinforcing the principle that the specific facts of each case must be evaluated by courts when constructing equitable distribution schemes, alimony awards, and the relation between the two.

For family law practitioners, leveraging Rule 72(t) effectively requires not only a solid understanding of statutory provisions and appellate case law but also a thoughtful analysis of the client’s unique financial landscape. By incorporating these considerations, attorneys can deliver innovative, customized solutions that secure their clients’ short- and long-term financial well-being.

In a legal landscape that is increasingly driven by financial complexity, Rule 72(t) stands out as a strategic option for achieving equitable resolutions. Properly applied, it has the potential to transform the division of retirement assets from a static allocation into a dynamic resource that meets immediate needs without sacrificing future security. Family law practitioners who master this approach can provide exceptional advocacy and guide their clients through the financial intricacies of dissolution of marriage cases with confidence and precision.

Hunter J. Hendrix, Esq. is a Senior Attorney at Autumn Beck Blackledge PLLC in Pensacola, Florida and exclusively practices Marital and Family Law with extensive experience with business entities and complex financial matters. Learn more about Mr. Hendrix and his firm at www.autumnobeck.com/ staff-profiles/hunter-j-hendrix/.

Jason Soman, CPA/ABV, ASA, CFE, CDFA® is a Partner at Soman Stewart Business Valuation & Forensic CPAs in Boca Raton, Florida. Mr. Soman specializes in advising legal counsel and clients on issues relating to business valuation, spousal support, and other financial forensic issues in divorce matters. Learn more about Mr. Soman and his firm at www.ssforensics.com.