How Can I Access My Retirement Savings Early?

Retirement savings accounts like IRAs and 401(k)s offer plenty of benefits for long-term savers. But one drawback is that they usually lock your investments up until “retirement age,” which the IRS has decided is 59 1/2 years old. Withdrawing your funds before that age usually results in a 10% early withdrawal penalty, with a few exceptions for specific expenses like buying a first home or paying big medical bills.

But if you plan to retire earlier than normal and have a lot of money in your retirement accounts, you might want to start withdrawing those funds before age 59 1/2. Here’s how.

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Withdraw Roth contributions

If you own a Roth IRA, you’re able to withdraw the amount you’ve contributed at any point in time. The earnings on those contributions, however, must remain locked up until 59 1/2 in order to avoid the penalty.

So, if you diligently contribute $5,000 per year to your Roth IRA for 20 years, you can withdraw up to $100,000 before age 59 1/2 with no penalty. Hopefully your account has much more than that after 20 years of investing, and any earnings above that will continue to grow tax-free.

Since you’ve already paid taxes on those contributions, there are no additional taxes on the withdrawal.

Withdraw Roth conversions

If you convert funds from a traditional IRA or other retirement account to a Roth IRA, you can withdraw the amount converted penalty-free after five years. If you plan ahead, that means you can access any retirement savings within five years and avoid paying a penalty on the withdrawal.

The ability to withdraw Roth conversions allows for a strategy called the Roth conversion ladder. Every year, you convert the amount you expect you’ll need to meet your spending expectations from a traditional IRA to a Roth. You’ll pay taxes when you make the conversion.

Five years after the conversion, you’ll be able to start making annual withdrawals from your Roth IRA without penalty. For example, if you made a Roth conversion during 2021, you’d be able to withdraw the amount you converted starting at the beginning of 2026.

Take advantage of the rule of 55

401(k) plans have a special rule that says if you separate from your employer the year you turn 55 or older, you can immediately start taking distributions from that employer’s 401(k). This is commonly referred to as the rule of 55.

If you want to access all of your retirement savings, you can roll over old 401(k)s and IRAs into your current 401(k) just before you separate from service. Then, when you leave your job, you can start making withdrawals without penalty. Importantly, you need to keep the funds you plan to withdraw in your most recent 401(k) until you turn 59 1/2, since the early withdrawal rule only applies to that specific account.

One way to take advantage of this is to establish a solo 401(k) for yourself if you can generate some form of business income. Many brokerages offer simple boilerplate solo 401(k) plans with no additional fees and a wide array of investment options. Be sure to pick a provider that will allow you to roll over old 401(k)s and IRAs into the solo 401(k).

The idea is that once you have all your savings in the solo 401(k), all you have to do is quit generating business income in the year you turn 55 or older. Then you can immediately start taking withdrawals. Consult with your accountant to tailor a plan to your own situation and ensure you handle all the details correctly.

Substantially equal periodic payments

Section 72(t) of the Internal Revenue Code allows investors to take annual distributions from their retirement accounts without penalty. The amount of the distribution is determined in one of three ways based on life expectancy. Importantly, if you plan to go this route, you must continue taking distributions for at least five years or until you turn 59 1/2, whichever is later.

In order to use 72(t) withdrawals most effectively, determine how much you’d like to withdraw every year, and use one of the three methods offered by the IRS to calculate your distribution options. Pick the one closest to your target. You’re allowed to change payment calculation methods just once per lifetime, so choose wisely.

Only pay the penalty if you have to

The above are some creative ways to access your retirement savings before age 59 1/2. While you can always pay the penalty and withdraw funds directly if you absolutely have to, using proper planning will ensure you can keep more of your money. If you plan things right, you may be able to retire earlier than you thought.

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