Fixed Amortization Method

What Is the Fixed Amortization Method?

The fixed amortization method refers to one of three ways by which early retirees of any age gain access to their retirement funds without penalty before turning 59½ under Rule 72t.

The fixed amortization method spreads retirees’ account balances over their remaining life expectancies, as estimated by Internal Revenue Service (IRS) tables, at an interest rate not more than 120% of the federal mid-term rate. The withdrawal amount, with one exception, cannot be changed until age 65 once it is calculated. Otherwise, retirees must pay a penalty of 10% plus interest per year, beginning with the year distributions began, up until the year of the change. Stopping account withdrawals also leads to penalties.

The two other methods for penalty-free retirement withdrawals are the fixed annuitization method and the required minimum distribution (RMD) method. Note that the RMDs are to be taken after retirement and are not early distributions.

Key Takeaways

  • The fixed amortization method is a method to withdraw retirement funds without penalty before turning 59½ under Rule 72t.
  • The fixed amortization method spreads retirees’ account balances over their remaining life expectancies as determined by IRS tables.
  • Typically, the withdrawal amount cannot be changed until age 65; otherwise, retirees must pay a penalty.

How the Fixed Amortization Method Works

Rule 72t only comes into play for those who plan on retiring before age 60, and financial planners use it fairly sparsely. Some planners avoid both the fixed amortization and fixed annuitization methods, as they are not flexible, require assumptions that must hold for many years in some cases, and, as is the case for Rule 72t, have many rules and restrictions.

The fixed amortization method produces higher payments than the required minimum distribution method in some cases. Still, it involves complex calculations and runs the risk of not keeping up with inflation or the pace of rising prices. As its name implies, the fixed amortization method results in a payment that is fixed. Such is the case for the fixed annuitization method, as well.

Conversely, the required minimum distribution method is recalculated each year. Of the three, the required minimum distribution method is simplest, but it often results in the lowest annual payment. It also generally runs the lowest risk of premature account depletion, since payments reset lower in the event of a large drawdown.

The only distribution type change the IRS allows without penalty is a one-time move to either the fixed amortization or fixed annuitized methods to the required minimum distribution method. This is mainly for investors that suffered large drawdowns, so they reduce their distributions and make what’s left in their account last longer in retirement.

Example of the Fixed Amortization Method

For example, assume a 53-year-old woman with an IRA earning 1.5% annually, and a balance of $250,000 wishes to withdraw money early under rule 72(t). Using the fixed amortization method, the woman receives about $10,042 in yearly payments, based on the current table. With the minimum distribution method, she receives $7,962 annually over a five-year period. Using the fixed annuitization method, however, her annual payment is about $9,976.

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  1. Internal Revenue Service. "Retirement Plans FAQs regarding Substantially Equal Periodic Payments." Accessed Nov. 4, 2020.

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