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Optimally Applying 72t Rules When Funding Your LIRP IUL

72t rules

Reviewed By: Rob Pinner

Rob Pinner Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

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Fact Check By: Holly Mitchell

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

As you regularly invest a portion of your paycheck in a 401k, IRA, or other qualified plans, you’ll likely realize that untaxed dollars will become taxable at a time when you need them the most.

While most hard-working Americans focus on accumulating wealth for retirement through financial planning, those who pay close attention will soon understand that your planning should be more about what you keep rather than what you accumulate.

If you have finally realized that because of government constraints on your retirement plans such as the early withdrawal penalty, contribution limits, and required minimum distributions, it’s time to consider funding a life insurance retirement plan using indexed universal life insurance.

By using money in a qualified plan to fund a life insurance policy that is not subject to government constraints, tax liability, and penalty-free, you’ll keep much more of your wealth and give less of it to the federal government.

If this sounds like you, it’s critically important that you understand the 72t rules when funding your LIRP IUL.

What is Rule 72(t)?

72(t) is the IRS rule that allows individuals to withdraw funds from a qualified retirement account (401(k), IRA, etc.) before turning 59 ½ without being subject to the 10% penalty.

With rule 72t, you can access your retirement funds early. But there is a trade-off: you must take Substantially Equal Periodic Payments (SEPPs) every year for five years, or until you reach age 59 1/2 – whichever is longer.

The only exception for Rule 72t is if an individual becomes disabled or dies.

Consider the following examples:

  • If an individual begins taking 72t required payments at age 50, they must continue taking these annual payments until age 59 ½ or for 9 ½ years
  • If an individual begins taking 72t required payments at 55 years old, they must continue taking the annual payments until age 60 or for five years.
  • If an individual begins taking 72t payments at 57 years old but then becomes disabled the following year, they will then be allowed to stop taking payments because they qualify for the disability exception.

Rule 72t Pitfalls to be Mindful Of

As with any IRS rule, there is a substantial list of pitfalls you must be mindful of. For example:

  • If the individual alters or stops taking their 72t payments without a qualified exception, the IRS will enforce the 10% penalty on all of the funds you accumulated before turning age 59 ½.
  • Any withdrawals you have taken will be considered taxable income which would likely push the individual into a higher income tax bracket.
  • Depleting qualified retirement accounts early could result in not having the funds needed to last through retirement years.
  • An individual cannot add or take funds from their qualified plan for other reasons while the 72t payment plan is in effect. This means the account is frozen until the required payment plan is completed.

How to Calculate 72t Payments

With rule 72(t), account holders can receive periodic payments based on their life expectancy. There are three IRS-approved methods to calculate life expectancy:


The amortization method is a way to determine how much you should withdraw from your IRA account each year, based on your life expectancy. This method ensures that you’ll withdraw the largest possible amount that is still reasonable, and the amount is fixed annually.

Minimum Distribution 

The IRS minimum distribution method uses a single or joint life expectancy table to determine how much can be withdrawn from a retirement account each year. This method is nearly the opposite of the amortization method, as annual payments may vary from year to year.


By using the annuitization method, you can rest assured that your payments will be taken care of in accordance with the SEPP regulation. This method offers account holders a fixed annual payout, which is usually somewhere between the highest and lowest amount the account owner can withdraw.

Be careful. Making withdrawals from a qualified retirement account should be done only as a last resort and should only be done with the support of experienced insurance professionals and financial advisors. The IRS has established exceptions for certain circumstances, like disability or illness. If you don’t fit into any of the other categories of exceptions, then you may be able to use rule 72(t) if you have no other options.

Who Should Consider Taking Rule 72t Payments?

As was mentioned early on in this article, individuals who’ve come to the realization that their qualified retirement plan(s) will be severely impacted by the tax liability when it comes time to withdraw the funds for retirement, are typically better off funding a LIRP with taxable retirement funds.

Generally, this method is only recommended when after-tax money is simply not available to properly fund an Indexed Universal Life Insurance policy that will not be subject to typical government constraints and can deliver a tax-exempt income stream for retirement.

Additionally, an IUL that is linked to well-performing index funds is generally immune to losses that can be experienced by other traditional retirement plans. 

An experienced insurance or financial professional can illustrate for you how to withdraw funds from your LIRP without the tax liability that comes with a typical qualified retirement plan. Complete the form on this page to get started.