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How To Get Retirement Money Early

It’s usually not ideal nor recommended, but sometimes people want or need to access retirement and other long-term savings plans early. This could happen for a variety of reasons – not all of them negative:

Pros and Cons

Understand that there is a tradeoff to taking money out of retirement accounts and other long-term vehicles. Money in IRAs, 401(k)s, SEPs, SIMPLE plans and the like grows on a tax-advantaged basis: Traditional accounts grow tax-deferred, while Roth IRA money and money in designated Roth accounts grows tax free. There’s a cost to taking money that grows on a tax-advantaged basis out of its former habitat, paying taxes on it, and then subjecting it to additional capital gains and dividend tax in future years – or spending it outright.

Taxes and Penalties

Generally, you must pay income taxes on any tax-deferred money you take out of a traditional IRA (special rules apply for money you have contributed to traditional IRAs on a nondeductible basis), SEP IRA or 401(k).

Hardship Withdrawals

Federal law provides for certain ‘hardship’ exemptions to the early withdrawal exemptions for IRA owners. Here are some of the most common:

  • Total disability
  • To prevent eviction or foreclosure
  • To fund college education for yourself or a loved one
  • To fund a down payment on a first home of up to $10,000 ($20,000 if you are married and both you and your spouse are first-time homebuyers).
  • To pay unreimbursed medical expenses (to the extent they exceed 10 percent of your adjusted gross income.)


 Special Rule for 401(k)s

If you take money out of your 401(k) directly, the 401(k) custodian will withhold 20 percent automatically and send it to the IRS to pay expected taxes. You will still owe income taxes on the full amount (minus the amount withheld) – plus a 10 percent penalty for early withdrawals, if applicable. To avoid having the 20 percent withheld, roll the 401(k) balance over to an IRA first, and then take the money out.

401(k) plans don’t have hardship provisions under federal law, though individual plans may provide for them at the plan sponsor’s discretion.

401(k) Loans

Some employers (not all) allow you to borrow money from your 401(k) as long as you still work for the company. Interest will accrue. You have 5 years to repay the loan. If you don’t, the IRS will treat it as a distribution and you will owe interest and taxes on unpaid amounts.

Section 72(t)

This is an option for those electing early retirement. If you don’t want to pay an early withdrawal penalty on retirement funds, Congress has a built-in safety valve: Under IRC Section 72(t), you can start taking income from your IRAs at any age, penalty-free, provided you commit to taking the money out in substantially equal periodic payments over your lifetime. Your minimum withdrawals will be determined by a special mortality table. Essentially, you must commit to annuitizing your IRA. You will still have to pay income tax on money you take out – as you would anyway. But the early withdrawal penalty will not apply as long as you stick to your 72(t) compliant substantially equal periodic withdrawals.

((Side Note))): When deciding to initially build a retirement account, consider some alternative non-traditional vehicles like specially designed life insurance a.k.a private equity funding, 7702 accounts,  which provides more access, less restrictions and more control over your funds, not to mention safety and growth potential. To learn more about this concept that the wealthy have been using for years and have kept from the middle class, pick up my book or audio of You be the bank~Finance Yourself to Wealth for more details!!!

In conclusion, Its best if you speak with a trusted retirement specialist to assist you in the best strategy to minimize taxes and penalties when considering taking money out early. Sometimes there are other options or strategies that may work out better for you in the long run.  Feel free to contact me for a free no-obligation 30 min consultation to review your potential options. (301) 577-6340. or email:

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