Accessing Your Retirement Assets Before age 59.5

You’ve been working hard for decades and aggressively saved so that you can retire early. Your investments haven’t just done well, they’ve done great, and you’re starting to think you may be able to retire as early as 50, or at the very least 55.

There’s only one issue: the vast majority of your savings are in retirement accounts – funds you can’t access without a 10% penalty until you turn 59.5. Your taxable brokerage account has done well but definitely isn’t large enough to sustain your lifestyle for 4.5 years, let alone 9.5 if you decide to retire at 50. So, is your early retirement dream dead in the water?

Not necessarily!

The good news is that investors who need to access their retirement savings before 59.5 have some options they can take advantage of, namely the Rule of 55 and Rule 72(t).

Rule of 55

The Rule of 55 allows for individuals who leave their job at 55 or older to withdraw from their qualified plan without having to pay the 10% early withdrawal penalty. While this is very much a benefit for those looking to retire at age 55 or later, there are some key considerations:

• Always consult with your plan provider and ensure you review your withdrawal options before taking any action.
• Some plans do not offer partial withdrawals once you’ve left your employer, meaning you could be forced to withdraw the entire account balance at once. While rare, this is something that most people will want to avoid since the entire amount will be taxable as income.
• Withdrawals are still taxable, only the 10% penalty is waived.
• The Rule of 55 exception only applies to the qualified plan of your employer that you retired from; i.e., it does not apply to IRAs or retirement accounts from previous employers.
• If you were to roll your IRAs and old 401(k)s into your current 401(k) before leaving the company, those funds would also fall under the Rule of 55.
• If you decide to work somewhere else later on, you can continue taking withdrawals from the account under the Rule of 55 as long as the account stays with the former employer and isn’t rolled over into an IRA or your new workplace plan.

Does the Rule of 55 work for you?

The Rule of 55 can work for clients who:

• Have substantial retirement assets but need access to them to retire early
• Are looking to change careers, partially retire, or work part-time but need access to their retirement funds to pay for some of their living expenses
• Need immediate access to funds to pay bills until they find another job

The Rule of 55 won’t work for clients who:

• Have qualified plans with their current company that are restrictive or don’t allow partial withdrawals.
• Want to retire before 55 and need access to their qualified funds before then.
• Have small retirement accounts with the employer they’re retiring from.

Rule 72(t)

Rule 72(t) allows for individuals to take penalty-free withdrawals from qualified accounts such as IRAs, 401(k)s, or 403(b)s before age 59.5. Unlike the Rule of 55, this can be done with any qualified retirement account you own and can be taken advantage of at any age.

So what’s the catch?

To take advantage of this strategy, you must take at least 5 substantially equal periodic payments, also known as SEPPs, from the account before you can stop the strategy. These payment amounts are based on your life expectancy as calculated through IRS-approved methods, and you must follow the specifically calculated schedule for withdrawals.

This means that the 72(t) strategy can be very inflexible on the amount you can withdraw each year and may not provide sufficient income coverage if you have plans for large expenses during the five-year period you’re required to make withdrawals.

There are currently 3 different calculation methods allowed by the IRS:

• The amortization method
• The minimum distribution method, also known as the life expectancy method
• The annuitization method

The amortization method creates an amortization schedule based on the balance of the qualified retirement account and a single or joint life expectancy. By doing this, it determines the largest and most reasonable fixed amount that can be withdrawn annually.

The minimum distribution method uses the IRS’s single or joint life expectancy table and applies a dividing factor to the retirement account’s balance. The difference between this and the amortization method is that the resulting payments are the lowest possible amounts that can be withdrawn annually.

The annuitization method uses an annuity factor method provided by the IRS to determine equivalent or nearly equivalent payments that comply with SEPP regulations. This offers investors a fixed annual payout that typically falls somewhere between the highest and lowest amount the account owner can withdraw.

Before taking advantage of Rule 72(t), it’s important to understand your specific income needs so that you can properly evaluate which claiming strategy works best for you. Not understanding the options available to you could put you at risk of needing to withdraw more than is allowed and running into the additional 10% early withdrawal penalty.

Does 72(t) work for you?

Rule 72(t) can work for clients who:

• Want to retire early, have substantial qualified retirement investment assets, and have a consistent and predictable budget for as long as they need to withdraw.
• Want to use their retirement accounts to help bridge funding gaps between their early retirement date and when they turn 59.5 years old.

Rule 72(t) won’t work for clients who:

• Have limited qualified retirement assets.
• Have an annual budget during the withdrawal period that fluctuates and is unpredictable.
• Have enough taxable investment assets or other income to cover expense needs until 59.5.

The Bottom Line

Retiring early can come with its own set of unique challenges, a major one being access to retirement funds that are typically locked away until the retiree turns 59.5 years old. The Rule of 55 and Rule 72(t) are options that can be available to early retirees to circumvent this restriction and take a major step towards a successful retirement.

When used correctly and for the right reasons, these strategies can make a massive difference and provide investors the financial support to accomplish their short and long-term financial goals. Whether it be transitioning to a lower-paying but less stressful career, switching to part-time employment, or retiring completely, the Rule of 55 and Rule 72(t) can provide investors with options to access funds that would otherwise be unavailable to them until age 59.5.

If you’re considering retiring before you turn 59.5, talk to your advisor so that you can begin working through which options and strategies best fit your needs. Doing otherwise may put your retirement at risk before it starts.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.