How to Access Your Retirement Accounts Before Age 59.5

"Don't contribute to your 401(k), that money will be locked up till you are at least 59.5"

I'm guessing you've heard some form of this by now. And it's funny, the people who give this advice are normally selling a different financial product...

There's a lot of misinformation out there and I want to break down why this statement isn't true.

For those that don't know, your 401(k) is a pre-tax retirement account. This means the contributions you make reduce your taxable income today and then when you pull the money out in retirement you will pay taxes on it.

But, you have no taxes between now and as it gets invested & grows.

Plus many 401(k)’s come with a match. For example, your employer may offer a 100% match to 3%, meaning if you put in 3% of your income, they will put the same amount into your 401(k). It’s nice to get free money, right?

(Also most have a ROTH 401(k) option where you can use post tax dollars)

Anyways, nearly every time someone doesn't use a 401(k) it’s because they're scared of it being “locked up,” but they're not fully educated on the rules of a 401(k).

They think that the only way to get money out before 59.5 is to take a 10% penalty, which is not true thanks to Rule 72(t).

What Is Rule 72(t)?

Rule 72(t) refers to a section of the Internal Revenue Code that outlines the process of making early withdrawals from certain qualified retirement accounts without paying extra penalties. It’s important to note that if you have a permanent disability, some medical expenses, inheritance, a first-time home purchase or college tuition payments then you can take the money out without a 10% penalty. However, if none of those apply, then rule 72(t) helps you get money out without the penalty.

Rule 72(t) basically lets you establish a schedule of annual (or more frequent) withdrawals from your retirement account called SEPPs. SEPPs means substantially equal periodic payments.

If you choose to withdraw money from a qualified account, like a 401(k), before 59 ½ then the funds are distributed to you as SEPPs. These regular payments are made over the course of five years or until you turn 59 ½.

Note: You have to carry them into your 60s if you started later.

Here are some rules you need to know to make this work:

1) You must schedule annual withdrawals, at a minimum

You can schedule several SEPP installments a year, if you like, but you must take at least one a year for five years, or until you turn 59 ½ whichever is later. If you miss even a single payment, you’ll owe the IRS early withdrawal penalties on all funds you’ve already taken out under your SEPP plan.

2) You must pay income taxes on money that’s never been taxed

That includes any contributions and earnings in your retirement account (just like any other time you pull from a pre-tax account).

3) You cannot withdraw funds from an account managed by an employer you’re still working for

Retirement accounts at your present job are not eligible for SEPPs.

Please be cautious when using Rule 72(t)—if you make any mistakes then you will owe a 10% penalty.

This is why you should work with an advisor to execute this strategy! There can be a lot of confusion with rule 72(t) as you try to figure out what the SEPPs are, the amount to take out, etc.

Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax , and financial team before making any changes to your financial plan.

‍