My Backdoor Early Retirement: Loving the Loophole

I consider what I’ve done a Backdoor Early Retirement. It took a backdoor approach to exit the rat race long before age 59 ½. I took control of the things that I could and then went for a little loophole to avoid IRA early withdrawal penalties. Almost all of my early retirement funding is from my tax advantaged retirement accounts. I would have never been able to retire early under traditional retirement standards and rules. Paying 10% penalties every year would kill my and anyone’s long-term retirement funding chances.

Backdoor Early RetirementWithout using the backdoor early retirement approach I would have missed out on the past 7.5 years of my rat race escape. I wouldn’t trade the freedom I’ve experienced and all I have done in my early retirement for nothing.

There are reasons why there is a 10% early withdrawal penalty for taking money out of our retirement accounts before age 59 ½. Some are thought-out logical government attempts to discourage us from prematurely spending down retirement savings. More or less protecting us from ourselves. They have the authority to do this. We are given a tax break through deferred taxation on the amounts of our contributions and investment gains. That said, although legal and allowed, the 72t backdoor early retirement approach I took requires careful thought and planning.  

Why I Call the SEPP IRA 72t a Backdoor Early Retirement Approach

To me “backdoor” simply means another way in, out, or through other than the more visible front-door. Early retirement bucks the traditional work and retirement norms. There are specific ages associated to standard penalty free retirement savings withdrawals (age 59 ½), our beginning Social Security payments (ages 62-70), and receiving Medicare health coverage (age 65). Retiring before these dates requires careful consideration and in my case the use of the IRS rule 72t, an exception  to the standard (above) front-door retirement age guidelines.   

That is why I call what I have done and continue to do a backdoor early retirement.

My Backdoor Early Retirement Funding Approach

How I Got Here and How It Has Worked Out

Money-wise my early retirement was/is only possible through use of this rule 72t IRS exception that some may call a tax/penalty loophole. Many people don’t know about it. Some of those who do know about it wonder whether it’s a safe route to take. I am sure some caution is advised but It has certainly worked for me.

I was at an obvious early retirement disadvantage. 85% of my portfolio was in IRAs and I was a long way from age 59 1/2. My non retirement account assets couldn’t cover my early retirement funding needs for very long and I had no other source of early retirement income.

That is why I took advantage of the IRS SEPP 72t exception.  It’s a backdoor rule where one can establish Substantially Equal Periodic Payments (SEPP) based on IRS guidelines and avoid the 10% early withdrawal penalties. The rules are strict and crossing them results in penalties back to the first withdrawal. I recommend the free 72t calculator that I used in my early retirement planning at

The calculator will give you an idea of how the 72t calculations figure out and allow you to play with different numbers. I have more on another page about this subject of using your 401K and IRA to fund your early retirement without an early withdrawal penalty

How my SEPP 72t IRA Sits Today-

In February 2010 I dedicated $665K to my SEPP IRA. You cannot add to this SEPP 72t IRA later on if it gets into trouble during a major market meltdown. Rotten market conditions or not, once started it must continue 72t payments until the required end or you suffer the 10% penalty all the way back to day one. It was decided best to invest my SEPP 72t IRA conservatively for income.

Note: You can make one 72t payout method change to the “minimum distribution” to save your account if necessary. That is an option if your finances will allow for a major retirement income reduction.

Because the amount is locked up for 5 years or age 59 ½ (whichever is longer) it is wise not to allocate all of your funds in a SEPP IRA for 72t. Having other accounts to access if needed is a good way to go. I invest for growth in my other IRA and Roth funds.

My May 31, 2017 statement shows the SEPP 72t IRA value at $595K. It’s down $70K from it’s start but has paid out $244K during the 7 years 3 months of early retirement monthly income to me. My 72t payments will continue for 6 more months until the end of 2017. That’s when I reach the age of 59 1/2. Even though the account is less than what I initially invested, as far as I am concerned this 72t backdoor early retirement funding approach is a success. That’s just how real life goes in investing. $70K for 7.6 years of early retirement is a good deal. Although this SEPP 72t IRA is a little down my other untouched IRAs/Roths are substantially higher since my retirement.

Today’s 72t Drawback

I retired early at the age of 51 in December 2009. I started my SEPP 72t payments in February 2010. At that time the approved 72t calculation interest rate was set at around 3.5%. Today (June 2017) it appears to be at 2.55%. What that means is that at today’s 72t approved interest rate it would take more money dedicated to the SEPP IRA to generate the same monthly retirement income/check I am now getting.

A low-interest rate environment is certainly a challenge to this backdoor early retirement approach. However one must assume that Interest rates will eventually rise. A strategy to use would be to establish one SEPP 72t IRA now and use other penalty free funds to supplement any income shortfalls. Then plan to later start a second SEPP 72t account once interest rates do go up. You can have multiple SEPP 72t IRAs working independently to fund your early retirement.

There is one good thing about being forced to use a low interest 72t calculation for your early retirement 72t income. It reduces the chance of exhausting your SEPP 72t IRA through taking too high of a set withdrawal amount from it. In my case the interest rates dropped after I began my 72t causing investment interest income to also drop.

Of course this backdoor is closed if such low approved interest rates makes it so there isn’t enough in your portfolio to dedicate to a SEPP 72t IRA and meet your specific funding needs.

Last Words on this Backdoor Early Retirement Approach

Deciding to use SEPP 72t as a backdoor early retirement funding approach can be a little tricky. I had mine set up by the CFP that I had worked with for many years. They also manage my SEPP 72t and the rest of my portfolio. I receive a monthly deposit from my CFP firm.

Seek assistance through a trusted CFP, where your portfolio is held, or tax professional.  

There are certainly other backdoor early retirement funding approaches that can be taken. Like building Roth ladders, backdoor Roth strategies, having enough non-retirement account funds available, retirement side hustles, and passive income strategies.

Research and find the approach that will work best for your unique situation. My backdoor early retirement funding strategy has worked very well for me. I hope my sharing this gives you ideas for your own approach to pursue.

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6 thoughts on “My Backdoor Early Retirement: Loving the Loophole

  1. Good description of how to use the 72t rule for early retirement and avoid the 10% penalty. Always good to hear how it actually works in practice.

  2. I dont know if Ill ever need to do this but it is nice to know more about it. I’m sure on some level it can be hard to pull out that money knowing it could keep compounding. But at some point you realize that having your freedom is more important than possibly making a little more by leaving it in. I think it’s money well spent.

    1. Thanks for the comment Arrgo. I over emphasized my tax deferred retirement account savings during my journey towards early retirement. I really had no alternative but 72t to free myself from a long and obligating career to a life where I could cherry pick how I wanted to live. Although the IRA amount used for my 72t could have compounded during that time, it’s funding actually allowed me to increase my overall net worth. I used the 72t to live of off and all of my income from my near 4 yr encore career went directly into mortgage payoff, Roth, and non retirement accounts. You are right, it was money well spent. The 72t worked for me as my ticket to freedom to pursue my interests and passions.

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