Some individuals retire earlier than expected due to layoffs, health concerns, or job changes. Others may choose to leave the workforce early after meeting personal financial goals. In either case, the question often arises: Is it possible to access retirement funds before age 59½ without the IRS’s 10% early withdrawal penalty?

In certain circumstances, yes. While the 10% penalty generally applies to early distributions from retirement accounts, the IRS provides specific exceptions. Even if a penalty is avoided, ordinary income tax may still be due on withdrawals from tax-deferred accounts.

Because the requirements for these exceptions are detailed and subject to change, it is important to consult a qualified financial and/or tax professional before making any withdrawal decisions.

The Rule of 55: Early Withdrawals from Certain Employer Plans

The Rule of 55 may allow penalty-free withdrawals from an employer-sponsored retirement plan such as a 401(k) or 403(b) if all of the following apply:

• You separate from service in the calendar year you turn 55 or later.
• The withdrawals come from the plan of the employer you just left. Withdrawals from former employers’ plans do not qualify.
• The rule does not apply to IRAs.

Example (Hypothetical):
An individual leaves their job in the same calendar year they turn 55 and has a 401(k) with that employer. Under the Rule of 55, they could begin taking withdrawals from that specific 401(k) without the 10% penalty, though ordinary income tax would apply.

Strategy Consideration:
If permitted by the plan, consolidating old employer plan balances into a current employer’s plan prior to separation may increase the amount accessible under the Rule of 55.

Rule 72(t): Substantially Equal Periodic Payments (SEPP)

Rule 72(t) provides another way to take early withdrawals from IRAs and certain employer plans without the 10% penalty, provided all requirements are met:

• Withdrawals must be Substantially Equal Periodic Payments (SEPP) based on IRS-approved calculation methods.
• Payments must continue for at least five years or until you reach age 59½, whichever is longer.
• Approved methods include:
  • Required Minimum Distribution Method – Lowest initial annual withdrawal amount, recalculated each year.
  • Fixed Amortization Method – Equal annual payments based on a fixed interest rate.
  • Fixed Annuitization Method – Equal annual payments based on an annuity factor.

Example (Hypothetical):
An individual age 53 with an IRA begins SEPP withdrawals using the Required Minimum Distribution method. Payments are calculated annually based on the account balance and life expectancy under IRS tables.

Important:
SEPP schedules are binding. Modifying or stopping payments before the required period ends can result in penalties applied retroactively to the first year, plus possible interest.

Roth IRA Contributions: Special Access Rules

Roth IRAs have unique withdrawal rules that set them apart from other retirement accounts. One of the most flexible features is that your contributions — the amounts you personally deposit into the account — can generally be withdrawn at any time, for any reason, without triggering taxes or penalties. This is because you’ve already paid income tax on those contributions before putting them into the Roth IRA. The IRS also applies an “ordering rule,” meaning contributions are considered the first funds withdrawn, ahead of any investment earnings, which can make accessing your principal simpler and more predictable.

However, the rules become more restrictive when it comes to withdrawing earnings — the growth generated by your investments in the account. If you withdraw earnings before reaching age 59½ and before the account has been open for at least five years, the IRS may treat those withdrawals as taxable income and impose the 10% early withdrawal penalty, unless you qualify for an exception. Common exceptions include situations such as disability, certain education expenses, or a first-time home purchase, but each has specific criteria that must be met to avoid penalties.

Because the tax treatment of Roth IRA withdrawals depends on factors like your age, how long the account has been open, and the type of funds being withdrawn, it’s important to plan carefully. Understanding these distinctions — and how they might apply to your financial situation — can help you make the most of your Roth IRA while avoiding unnecessary taxes or penalties.

Additional Exceptions to the Early Withdrawal Penalty

The IRS also allows certain other exceptions to the early withdrawal penalty, which can apply in specific circumstances. These include withdrawals made due to disability, the death of the account holder (by beneficiaries), or a terminal illness as defined by the IRS. Penalty-free withdrawals may also be permitted for qualified birth or adoption expenses, certain domestic abuse situations (subject to limits), and unreimbursed medical expenses that meet IRS criteria. In some cases, IRA holders may take penalty-free withdrawals to cover certain health insurance premiums, qualified higher education expenses, or up to a $10,000 lifetime limit for a first-time home purchase.

While there are ways to access retirement funds before age 59½ without the 10% penalty, each method has specific requirements and potential tax consequences. Withdrawals can also impact long-term retirement readiness.

Because the rules are complex and subject to change, individuals should review their options with both a qualified financial professional and a tax advisor before proceeding. Contact Mirus Financial Partners for more information, or to review your individual situation.

This material is for informational purposes only and should not be construed as tax, legal, or investment advice. IRS rules and regulations may change, and certain exceptions may have additional conditions. Before making any early withdrawal from a retirement account, consult with a qualified tax professional and/or financial advisor to determine the potential impact on your overall financial situation.