Retiring Early? Here’s How to Access Retirement Funds Without a 10% Penalty

Dreaming of retiring before age 59½? You’re not alone—but accessing your retirement funds early can come at a cost. Typically, withdrawing from traditional retirement accounts like a 401(k) or IRA before age 59½ triggers a 10% early withdrawal penalty, plus income taxes. However, with proper planning, you can tap into those funds without paying that penalty. Let’s explore three strategic options: IRS Rule 72(t), Substantially Equal Periodic Payments (SEPP), and Roth IRA contributions.

1. IRS Rule 72(t): The Early Retirement Lifeline

IRS Rule 72(t) allows penalty-free early withdrawals from IRAs (and sometimes 401(k)s) before age 59½—if you follow a specific withdrawal schedule. This rule lets you avoid the 10% penalty by taking Substantially Equal Periodic Payments (SEPPs).

• How it works: You must withdraw a fixed amount annually based on one of three IRS-approved calculation methods: RMD (Required Minimum Distribution), Amortization, or Annuitization.

• Commitment matters: Once you start, you must continue the withdrawals for at least five years or until age 59½, whichever is longer.

• No going back: If you stop or modify your SEPPs early, you could be hit retroactively with penalties and interest.

This method can be powerful—but it requires careful calculation and long-term discipline.

2. SEPP Strategy: A Closer Look

SEPP isn’t just a loophole—it’s a legitimate retirement income strategy for those who leave the workforce early. It can work well for individuals who:

• Have substantial funds in an IRA

• Are under 59½ and need to supplement other sources of income

• Can commit to a fixed income stream without disruptions

Since the IRS doesn’t allow changes once you start, it’s crucial to get professional help when setting this up. A misstep could cost you thousands in penalties.

3. Roth IRA Contributions: Your Early Access Cushion

Here’s a lesser-known but incredibly flexible option: Roth IRA contributions.

• No penalties, no taxes: You can withdraw your direct contributions (not earnings) from a Roth IRA anytime, tax- and penalty-free.

• Qualified distributions: If your account is over five years old and you’re 59½ or older, withdrawals of earnings are also tax-free.

• Early retiree tip: Roth contributions can act like an emergency fund or income bridge for early retirees.

For example, if you contributed $50,000 to a Roth over the years, you can withdraw that $50,000 any time without penalty—even if you're 40 years old.

Plan Smart, Retire Confidently

Early retirement is possible—but tapping into your retirement accounts before 59½ without a plan can get expensive. At Avalon Tax & Financial Services, we help early retirees develop tax-smart withdrawal strategies that align with long-term financial goals. Whether you’re considering 72(t) distributions, SEPP, or optimizing your Roth contributions, our advisors can guide you through the process.

Retiring early shouldn’t cost you extra. Let’s make your money work smarter.