Retirement savings are meant to be used when you retire, so the government created rules to discourage people from withdrawing their money early. You could lose 10% of your withdrawal back to the government if you take money out of most retirement accounts before age 59 1/2, and that's on top of taxes. 

It's a huge problem for those who plan to retire in their 50s, but there are a few strategies you can use to avoid these penalties.

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1. The Rule of 55

The Rule of 55 states that if you leave your job in the year you turn 55 or later, you may withdraw money from that job's retirement account without a penalty. Those who work in public safety jobs, like police officers and firefighters, can take advantage of this rule in the year they turn 50.

There are a few things to note about this. First, it doesn't give you free rein to use all of your retirement savings. You can only take withdrawals from the retirement account you had with your most recent employer. If you plan to live off these withdrawals until you turn 59 1/2, make sure you have enough money in the account first. If you have old 401(k)s, your new plan may allow you to roll them over into your current 401(k). This will increase your balance.

The other thing to remember is that this rule applies to the year you will turn 55, not necessarily when you reach your 55th birthday. If you will turn 55 in December of 2022, you can start taking penalty-free withdrawals as early as Jan. 1, 2022, as long as you and your employer have parted ways. 

Some people mistakenly believe that the Rule of 55 allows them to make penalty-free withdrawals in the year they turn 55, regardless of when they quit their jobs, but this isn't true. If you quit your job in the year you turn 54, the Rule of 55 won't apply to you. You'll have to either wait a year to quit or try some of the other strategies listed here to access your retirement savings early.

2. Substantially equal periodic payments 

You can use substantially equal periodic payments (SEPPs) to access your retirement savings penalty-free at any age. But it's only a good idea for those who have substantial personal savings.

SEPPs allow you to withdraw money from your retirement account on the condition that you continue to make equal withdrawals annually for five years or until you reach 59 1/2, whichever is longer. So someone starting at 57 would have to make SEPP withdrawals until 62, while someone starting at 50 would have to make withdrawals until 59 1/2.

There are a few different ways you can calculate how much you have to withdraw each year. One way is to use the IRS's Single Life Expectancy table. You divide your account balance by the life expectancy factor for your age to get your SEPP. For example, if you had $250,000 in your retirement account and you were 50, you'd check the Single Life Expectancy table and see that 50-year-olds have a life expectancy factor of 34.2. You'd divide $250,000 by 34.2 to get about $7,310. That's how much you'd have to withdraw this year if you chose this method.

Once you've begun taking SEPPs, you can't stop until you've either turned 59 1/2 or have taken your SEPPs for five years. If you fail to take all your required SEPPs, the IRS will retroactively charge you the 10% early withdrawal penalty on all the money you've previously taken out. 

3. Roth IRA contributions

Anyone can withdraw their Roth IRA contributions at any time because they've already paid taxes on them. But you usually can't withdraw your earnings without penalty until you've reached 59 1/2 and have had your Roth IRA for at least five years.

If you plan to use this strategy, you should investigate how much of your Roth IRA balance is contributions and how much is earnings. If you inadvertently withdraw earnings, you could face taxes and penalties. 

4. Exceptions to the early withdrawal penalty

The government makes exceptions to the 10% early withdrawal penalty to allow people to access their retirement savings in certain situations. Here are a few times you can withdraw from your accounts without a penalty:

  • You become totally and permanently disabled.
  • You use the money for qualified higher education expenses.
  • You use the money to purchase your first home (with a maximum withdrawal of $10,000).
  • You use the money to pay for medical expenses in excess of 10% of your adjusted gross income.
  • You use the money to pay for your health insurance premiums while unemployed.

Always check into the rules for your specific retirement plan before making a withdrawal for any of these reasons to ensure you won't face a penalty. Keep in mind you could still owe taxes if the money comes from a tax-deferred account.

Should you access your retirement savings early?

Before you use any of the strategies listed above, you should think about whether early retirement withdrawals are wise. They could be fine if you have a large nest egg and you've been planning to retire early for many years.

But if you need money in a pinch, withdrawing your retirement savings probably isn't a good idea. You could owe the government penalties and possibly taxes, and you'll slow the growth of your savings. Try using an emergency fund if you have one or consider taking out a loan before tapping your retirement savings.