In general, when you save for retirement, your goal is not to touch the money until you actually retire. However, sometimes, life gets in the way and you need to withdraw your retirement savings a little earlier than planned. However, governments often impose some pretty hefty penalties on early access to these funds, potentially rubbing salt in your wounds when it comes to running out of early savings. That said, there are a number of loopholes that you can look for that could allow you to access your retirement savings early at no cost.
For more help with retirement planning, check out work with a financial advisor.
Vulnerability 1: Rule 55
Generally, you have access to retirement income at age 59.5. However, if you retire at age 55 or older, you can withdraw money from your retirement account at the job you retired from without penalty. Behold Rule 55.
This means that if you’re 55 and think you have enough money to fund your entire retirement, you can do it without paying a penalty. However, this plan depends not only on having enough savings overall, but also having enough of that in a workplace plan at your current job. You could save $2 million from your previous job, and you still won’t have free access to it until age 59.5. Therefore, this loophole is best for people who have worked for a long time and have most of their retirement savings in a plan sponsored by that company.
Vulnerability 2: Legal exception
There are a few exceptions legally mandated by the government when a person can withdraw money from their retirement account without paying any penalty. Including:
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Permanently disabled
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Payment of qualified higher education expenses
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Buy your first home (maximum withdrawal is $10,000)
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Paying for medical expenses that account for more than 10% of your total income adjusted gross income
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Paying for health insurance while you are unemployed
If you fit into any of these, you may be eligible for a withdrawal without penalty, but make sure to check with your plan administrator. You may still owe tax if the account is tax-deferred.
Vulnerability 3: Roth IRA Contribution
With a Roth IRA, all the money you put in is taxed. When you withdraw money in retirement, none of it is taxable.
Although you cannot withdraw any investment interest you have earned until age 59.5, you can withdraw your actual contributions from a Roth IRA anytime. If you’ve contributed $4,000 a year for three years, you can withdraw up to $12,000 without penalty—but you can’t withdraw more, as that will eat into your earnings.
To use this strategy, you need to make sure you know the exact amount of your contribution relative to your account earnings to avoid accidentally withdrawing too much.
Vulnerability 4: Equal Substantial Recurring Payments
Equally substantial recurring payments allows savers to withdraw money from their retirement accounts, but by using this method you are locking yourself out of taking a large portion of your savings. For this reason, it is only recommended if your savings are substantial.
Here is how it works. Nearly equal recurring payments are made every year, and once you receive one, you must make them annually for at least five years or until you reach 59.5, whichever comes later . If you start at 45, you will have to pay for almost 15 years. If you start at age 58, you will receive payments until age 63.
There is also a minimum withdrawal based on your age and total savings. You find it using Single life table. This table gives you a life expectancy factor based on age. For example, the life expectancy factor for age 45 is 41.0. Next, you take your total savings and divide it by this—this will give you the amount you would have to withdraw if you were using roughly equal recurring payments. Let’s say you’re 45 years old and have $300,000 in savings. Divide $300,000 by 41.0 for about $7,317. You will have to withdraw that amount every year until you reach 59.5. If you don’t do this, the IRS will retroactively charge you a 10% penalty on all withdrawals.
Key point
In general, it is good practice to keep retirement savings in your account until you retire. However, if you need early access, there are a few things you can do to avoid penalties, as long as you qualify.
Retirement planning tips
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A financial advisor can help you prepare for retirement. Finding a qualified financial advisor is not difficult. SmartAsset of free tools connects you with up to three financial advisors serving in your area, and you can interview the right advisors for you for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.
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If you are using a 401(k)make sure you take advantage of every suitable employer available. This is free money, don’t leave it on the table!
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