Saving for retirement can be one of those things that is simple, but not easy. If you are like most people, you probably spend a lot of time and energy worrying about getting the money into your retirement accounts in the first place and haven’t considered how you’ll get it out.

In practice, adequately funding your retirement accounts can be tricky. At traditional retirement age, getting the money out of those accounts — and doing so in the most tax efficient way — is generally a complicated affair. For those who choose to retire early, getting access to this money can require some additional finesse. Inadequate planning may cause you to get caught with your hand in the retirement cookie jar, and hit with the 10% penalty tax.

The good news for people choosing to retire early (i.e. before 59 ½) is there are a few fairly straightforward ways to gain access to money in their tax advantaged retirement accounts without subjecting themselves to the 10% penalty imposed by the IRS. Here are the most popular techniques:

1. Live off other assets first

One of the best ways to use your retirement funds in early retirement is to not use that money during the early part of your retirement. I realize that may seem like a bit of a non-answer, but hear me out.

If you are the kind of person looking to retire early (whether that means calling it quits at 30, retiring by 40, or winding it down at 55) you probably aren’t planning to jump back into the rat race once you reach the “traditional retirement age.” In other words – you will still need money to fund the traditional retirement age portion of your retirement.

In that way, the money in your retirement accounts may be most beneficial to you if you can wait until 59 ½ to tap into it. The feasibility of using other “non-retirement” assets to fund the first years of your early retirement will obviously depend on the person. There are a few factors to consider, such as the size of your non-retirement nest egg, the level of your annual spending, and the age at which you retire.

  • More money + later retirement = easier
  • Less money + earlier retirement = more challenging
  • Enough money + reasonable retirement age = the sweet spot

So, what “other assets” are we talking about here? If you’ve got your eye on early retirement, you are likely a prodigious saver. That means you may be maxing out your retirement accounts with additional money left over. Here are some places you might be stashing that extra cash:

Taxable investment accounts – Many aspiring (and actual) early retirees have sizeable investments in broad market index funds. Most use one of the low cost providers such as Fidelity, or Charles Schwab.

The great thing about having investments in “regular” taxable accounts is that there is no penalty for selling your investments and accessing the money – regardless of your age.

Another benefit of taxable accounts is that any gain from the sale of those assets is taxed as Capital Gains, rather than as ordinary income like distributions from traditional IRAs and 401(k)s are. For assets held longer than one year, the much more favorable Long Term Capital Gains tax rates will apply. To give you an idea of how substantial this tax savings can be, the top federal income tax rate for ordinary income is 39.6%, while the top rate for capital gains is 20%.

Cash Savings – While traditional wisdom will tell you that an emergency fund of 3 to 6 months of living expenses is the minimum savings a prudent person should have, aspiring early retirees may have significantly more than that (12+ months) saved up.

Regardless of your emergency fund’s size, you may choose to move some of this cash once early retirement arrives . It could be allocated to living expenses, with a plan to rebuild (or not) that savings with retirement account distributions in the future.

You might be uneasy with the idea of tapping your emergency fund, and understandably so. Reallocating your emergency fund is not for everyone. However, consider what potential emergencies you have saved to cover.

Related: Where Do People Keep Their Emergency Fund?

During your working years, one of the largest potential emergencies is an interruption in your income, whether from a job loss or temporary disability. In early retirement, this is not as significant of a concern because you likely don’t have a job anyway. (Or if you do, it is likely “for fun.” After all, you’re retired, right?)

Additional income streams – Working a job isn’t the only way to get monthly cash flow. For many early retirees, alternative sources of income such as rents and royalties can help bridge the monthly income gap and lessen (or eliminate) the need to tap retirement accounts prematurely.

2. Withdraw Roth IRA contributions

Roth IRAs are a very popular way to save for retirement. The Roth IRA’s claim to fame, and the most well-known feature distinguishing it from a traditional IRA, is that contributions to a Roth IRA do not qualify for an income tax deduction.

In other words, Roth IRAs are funded with “after tax money.” The tradeoff essentially being that, by paying the tax up front, you are then able to withdraw all the gains income tax free after age 59 ½. This works great for traditional retirees, but how can an early retiree utilize a Roth IRA?

You Can Withdraw Roth Contributions at any time – Unlike a traditional IRA, where you get to defer paying income tax on the contributions in exchange for keeping your money locked up until 59 ½, with a Roth IRA you have already paid the income tax on the contributions. As such, you are free to withdraw your contributions to a Roth IRA at any time. However, this applies only to the contributions. You are not free to withdraw the earnings at any time.

Currently, in 2016, the maximum you are allowed to contribute per year to IRAs is $5500. Say you’ve been a diligent saver and maxed out your Roth for 15 years before choosing to retire early. That means you’d have $82,500 worth of contributions which you could withdraw tax and penalty free, without having to wait for 59 ½. Depending on the cash flow you need to cover your expenses, that has the potential to last quite a while.

Mix It Up: Leveraging Both a 401(k) and a Roth IRA For Retirement

Roth Conversion Ladder (Advanced) – You may have heard about the “five year rule” regarding withdrawal of funds from a Roth IRA. This rule does not apply to regular contributions, but rather applies to rollover contributions from other qualified retirement accounts. In essence, this rule imposes a five year waiting period before rollover contributions can be treated as regular contributions, and be withdrawn penalty-free.

In the early retirement community, this rule provides the basis for a technique called the Roth Conversion Ladder. This method is a way to move pre-tax contributions to from a traditional IRA or 401(k) into the Roth IRA. It can then be accessed before 59 ½.

Here’s a basic overview of how it works. Say you’re ready to retire early at 45 years old, and have $600,000 in a 401(k). You have some cash and taxable investments which will provide for most of your income needs. However, you anticipate needing $20,000 per year to make up the difference until you reach 59 ½.

Try to cover expenses for the first five years of your early retirement by tightening spending or pulling from savings. You can then use the Roth Conversion Ladder to pull out $20,000 per year from your 401(k) penalty free.

During the first year of your early retirement (age 45), you roll over $20,000 from your 401(k) into your Roth IRA*. Then you repeat this process every year for the next ten years (until age 55).

Then, in year five of your retirement (age 50), you can withdraw that first $20,000 rollover contribution penalty free, because you have satisfied the five year rule. Each subsequent year, you repeat this withdrawal (from ages 50 to 60). At this time, you’ll have reached 59 ½ and have full access to the rest of your 401(k).

(*Note that you will still pay taxes on this amount in order to roll it over into the Roth. This is because Roth contributions must be after-tax money. The good news here is that in early retirement, you likely are not working. You may have a lot more flexibility regarding where your tax rates end up. You could potentially pay little to no tax on the rollover depending how you’ve structured your income.)

See Also: How to Save Money on Taxes By Retiring Early

3. SEPP – Substantially Equal Periodic Payments

Internal Revenue Code § 72(t) allows for an exception to the 10% early withdrawal penalty. It allows for withdrawal from an IRA, qualified retirement plan, or 403(b) account, by letting you to take distributions in a series of “Substantially Equal Periodic Payments.”

In many ways, SEPP withdrawals are the most straightforward way to access money from your retirement accounts before 59 ½. Essentially, using one of the three IRS provided methods (Amortization, Annuitization, or Required Minimum Distribution) you can make withdrawals penalty-free. Keep in mind that you will still have to pay income tax on the withdrawals.

You can generally begin taking SEPP withdrawals at any time. Beware, though, that once you start, you cannot stop for five years or until you are 59.5, whichever comes last. For an early retiree, this is a serious consideration. Also note that you cannot start SEPP withdrawals from an employer-sponsored plan while you are still employed by them.

4. Just take it (and pay the penalty)

Generally speaking, you are allowed to withdraw the money from your retirement accounts at any time. The reason conventional wisdom tells us not to take the money out early? The IRS imposes a 10% penalty on top of your ordinary income tax rate for any early withdrawals from your retirement accounts.

Ouch! Ten percent is not a trivial amount of “extra tax” to pay, for simply taking your own money early. However, for some people this price may be worth it. This is especially true for people who received generous employer matches on their contributions, and/or who have had the benefit of significant appreciation and compounding.

That being said, the penalty is there for a reason. The choice to take your money early should not be made lightly. This is definitely one of those “check with your financial advisor” sort of decisions.

Related: Best Resources to Help You Retire Early

Closing thoughts

Tax advantaged retirement accounts are a fantastic way to save for retirement at a traditional retirement age. After all, it seems that those accounts were created with traditional retirement in mind. However, hopefully you now see how retirement accounts can be used in a variety of interesting ways. A little creativity will help facilitate an enjoyable (and well-funded) retirement at any age!

Thinking about early retirement? How do you plan to fund those pre-59 ½ years?


  • Evan Gautier

    Evan is an attorney licensed in California and Oregon. Though his legal practice is mainly focused on civil litigation, Evan has a passion for tax, retirement planning, and personal finance. When not in court or at the office, Evan can be found hiking around Southern California or tending his suburban backyard farm with his wife and daughter. Evan earned his J.D. from Western State College of Law, and an LL.M. in Taxation from Chapman University.