401(k) Withdrawal

What are the options for early retirement distributions?

Early retirement distributions are a great option to access your funds before retirement. Learn how to gain access to your funds and avoid any penalties.

3 min read

When it comes to saving for retirement, allowing your money to grow over time is the best way to build a nest egg you can live off during your twilight years. The IRS even charges penalties for distributions made early to encourage saving for retirement. However, there are options for you to take an early retirement distribution and avoid any such penalties.

When you withdraw money from your retirement accounts, you will be charged both tax and penalties in most instances.

If your money is in a tax-deferred retirement account like a 401(k), you will owe taxes on any distribution you make regardless of age. Withdraw retirement funds before 59½, and the IRS will charge you an additional 10%.

The options to receive early retirement distributions include substantially equal periodic payments, leaving your job after you’re 55, and hardship withdrawals are a few of the ways you can access your retirement funds early.

If you choose to receive early retirement distributions and avoid such penalties. Here’s how.

Substantially Equal Periodic Payments

Regardless of age, you can take early retirement distributions from your retirement accounts through substantially equal periodic payments—or SEPP. Often regarded as a Section 72(t) distribution, the IRS will waive the 10% penalty for withdrawing your retirement money early.

Substantially equal periodic payments work by dividing your retirement account balance by the number of years left in your life expectancy. The IRS provides a few tables to determine your life expectancy number.

Once your annual amount is calculated, you will then receive yearly distributions of equal amounts. These payments must continue for five years or until you reach 59½, whichever is longer.

Diminishing investment values and over-calculating withdrawal rates can deplete your retirement reserves sooner than you anticipate, potentially leaving you with little to nothing at the end of your retirement.

Leaving Your Job After Age 55

Another option to begin early retirement distributions without penalty is if you leave your job after you've turned 55. Whether you retire, quit, or were fired, you can elect to distribute funds out of your retirement account.

If you leave your job during the calendar year you turn 55, you can take advantage of this rule.

However, if you still have 401(k)s with a former employer but quit that job before turning 55, you won't be eligible to withdraw those funds without penalty.

It's best to rollover your 401(k)s as soon as you leave an employer to prevent any complications down the line. It's also easier to manage your portfolio's performance when everything is in one place.

Lastly, the early retirement distributions in this section only apply to 401(k)s. IRAs operate with different rules and aren't eligible for early withdrawal due to job loss after 55.

You Meet Other Criteria

Aside from SEPPs and job loss, the IRS categorizes several instances that are exempt from early distribution penalties.

Unique life circumstances qualify for early retirement distributions.

The following exceptions apply to distributions from any qualified retirement plan:

  • Distributions made to your beneficiary or estate on or after your death
  • Distributions made because of total and permanent disability
  • Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income; whether or not you itemize your deductions for the year
  • Distributions made due to an IRS levy of the plan under section 6331
  • Qualified reservist distributions made to individuals called to active duty
  • Distributions that are exempt from the additional income tax through federal legislation relating to certain emergencies and disasters
  • Distributions up to $5,000 made from a defined contribution plan or an IRA if the distribution is a qualified birth or adoption distribution

Other Distribution Options

There are a couple of non-hardship instances the IRS allows you to take early retirement distributions.


The costs associated with higher education, including tuition, room and board, and fees, can be covered from a retirement account.

As long as the funds are used for yourself, your spouse, or your children, step-children, or adopted children, they will be exempt from the 10% penalty.

First-Time Home Purchase

Distributions of up to $10,000 are allowed for expenses related to the purchase of your first home. This exemption extends to purchasing a home for your spouse, child, grandchild, grandparents, and spouse's grandchild or grandparents.

The $10,000 limit is a lifetime limit, however.

Birth or Adoption

You can withdraw up to $5,000 for the expenses related to the birth or the adoption of your child.

Final Considerations

Unless it's necessary to take early retirement distributions, it's best to leave your money in your 401(k) as long as you can. Not only will you avoid any unforeseen penalties, but you will allow your money to grow as much as possible.

Think of alternatives to withdrawing money from your retirements if you can. However, if it's necessary to take early distributions that meet the other criteria, you may be able to access your retirement money early.