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How to Avoid an Early Retirement Penalty

Every now and again, SYM Financial advisors and planners run into clients who retire early. There are many good reasons why someone might “retire early” in the eyes of the IRS, which is any time before reaching the age of 59½. Some are ready to separate from their jobs sooner than they had anticipated. Others may be impacted by layoffs, workforce reduction, or health problems that make it difficult to continue working.

No matter how you arrived at the place of early retirement, it is important to understand (and avoid) the early retirement penalty.

What Is the Early Retirement Penalty?

Early retirement penalty is a fee that the IRS charges anyone who wishes to take a withdrawal from their IRA, 401(k) or other qualified retirement plans before they’ve reached the IRS-defined minimum retirement age of 59½. The early retirement withdrawal penalty is 10% of the amount withdrawn, plus any federal income taxes that get triggered as a result.

Having a financial plan is a key to a successful retirement. However, sometimes life doesn’t go the way you thought it would. And when that happens, you’ll want to know how to avoid the early retirement penalty and navigate your way back to financial safety.

The good news is that it may be possible to access your funds and potentially avoid the early retirement penalty. In this post, we’ll outline a few strategies to consider.

How to Avoid the Early Retirement Penalty

There are several ways to avoid paying the 10% early retirement penalty. Here are some of the strategies to discuss with your financial advisor.

1. The 401(k) Age 55 Rule

If you have a 401(k) or a 403(b) account and plan to separate from your job in the year when you turn age 55 or older, the IRS will allow you to start taking withdrawals without a 10% penalty. This is often referred to as the “401(k) Age 55 Rule.” [1]

Note that this rule applies if you retire or leave the company during the calendar year when you turn 55 or greater. You cannot benefit from this rule if you left your company at an age earlier than 55, even if you wait to begin withdrawals until after your 55th birthday. Also, this rule allows you to potentially avoid a 10% penalty on the 401(k) or similar account, but not the IRA.

2. 72t Distributions

Most people don’t realize that there is a section of the IRS code Rule 72(t) that says IRA owners can withdraw their savings penalty-free if they agree to break them up into annuitized payments. This is called a series of “substantially equal periodic payments” or SEPPs. [2]

Your payments can be calculated using one of three ways:

  • The amortization method;
  • The minimum distribution or the life expectancy method; and,
  • The annuitization method.

Payments must continue for at least five years or until the account owner reaches age 59½, whichever is greater. Note also that SEPPs can only be taken from a traditional IRA. If you need to access the money from your 401(k), you must roll the 401(k) funds over to an IRA first.

3. Roth IRA Contribution Withdrawals

If you’ve been saving your money to a Roth IRA, those contributions are available for withdrawal penalty-free any time you like. After all, you have already paid your taxes on them.

However, the earnings portion, or the money that your investments have earned on top of your contributions, cannot be withdrawn before age 59½ without a penalty. Account holders who take withdrawals are responsible for tracking their basis (i.e., how much they’ve contributed to the Roth IRA) to ensure that their withdrawals don’t exceed the original contributions and dip into earnings. Your financial advisor can help you track your basis and recommend the level of withdrawals that balances your needs with minimizing the risk of penalties.

4. A Roth IRA Conversion Ladder

Under the current tax code, a person can make unlimited conversions from a traditional to a Roth IRA — as long as they’re prepared to pay the taxes that will come due at the time of the conversion. In addition, any amount that gets converted becomes eligible for withdrawal penalty-free after five years from the original funding date of the account.

If you have a sense that you would like to retire early, it may make sense to meet with a financial advisor and to discuss a plan to make a series of systematic conversions that will eventually produce penalty-free income. This strategy is often referred to as a Roth IRA conversion ladder. [3]

5. HSA Qualified Expenses

If you have an HSA (Health Savings Account) which is associated with a high deductible health insurance plan, you need to know that there are no time limits on how long you have to claim a medical expense.

In other words, people who separate from work before age 59½ can strategically accumulate their medical expense receipts and wait to claim their reimbursement until they’re no longer employed. For those who lean on this strategy, HSA reimbursements can potentially serve as an additional source of income. [4]

6. IRA Significant Medical Expenses

If you have qualified medical expenses that add up to more than 10% of your adjusted gross income, then you can make a withdrawal from your IRA without penalty to cover this expense. Keep in mind that the amount you withdraw cannot be greater than the total of these medical expenses. [5]

7. IRA Health Insurance Premiums

If you lose your job, the IRS will permit you to use your IRA to pay health insurance premiums. In this situation, penalties may be waived as long as you receive state or federal unemployment compensation for at least 12 consecutive weeks. [6]

8. Roth IRA Qualified Education Expense Withdrawals

Penalty-free withdrawals from Roth IRAs (including the earnings portion) are allowed if they are used for qualified higher-education expenses. [7]

These education expenses can be for yourself, your spouse, child, or even a grandchild. The student does not necessarily need to be your dependent. The only caveat is that the IRA has to have been opened at least five years prior to the qualified withdrawal.

9. IRA Disability

If you’re disabled, then you’re allowed to withdraw your IRA funds without penalty. [8] Note that the IRS definition of “disability” is different from the way Social Security defines it. To qualify for this exemption under the IRA rules, your disability must be “total and permanent.”

Early Retirement Penalty: Don’t Get Penalized for Changing Your Plans

As financial advisors, our SYM team helps clients to make the best financial plans for their circumstances, hopes, and dreams. Sometimes, those needs and goals change. If you ever find yourself facing a new development, it is important to understand your options. An experienced financial advisor can guide you toward your goals, point out risks and obstacles, and help you modify your financial plan — no matter what’s behind the next turn.

If you would like to get a second look at your retirement preparedness, schedule an appointment with a member of the SYM Financial team today.


  1. https://smartasset.com/retirement/401k-55-rule
  2. https://www.investopedia.com/terms/r/rule72t.asp
  3. https://www.iwillteachyoutoberich.com/blog/roth-conversion-ladder/
  4. https://hsastore.com/learn-early-retirement-fire-hsa.html
  5. https://www.pkfmueller.com/newsletters/avoiding-the-10-penalty-on-early-ira-withdrawals
  6. https://budgeting.thenest.com/use-ira-health-insurance-premium-20201.html
  7. https://www.hrblock.com/tax-center/irs/tax-responsibilities/roth-ira-withdrawal-for-education/
  8. https://www.aarp.org/retirement/social-security/questions-answers/disability-benefits-401k-withdrawal.html

Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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