401k Early Retirement Rules

How To Do It Right

The rules for 401k early retirement and IRA early retirement are very different! You need to know what they are, or it could cost you painful early withdrawal penalties or add restrictions you didn't expect.

You've set a date for starting your retirement - how exciting! Now the big question is how will you setup withdrawals from your retirement savings for an income stream?

As you plan for your early retirement, you should get familiar with the rules for early withdrawal, as well as the IRA withdrawal rules for retiring early, even if you don't currently have an IRA.

This is because it is common to do 401k to IRA rollovers, but it isn't always the right thing to do.

But first, what is early retirement?

For this discussion, early retirement refers to retirement that occurs before Social Security retirement age, which could be any age after 62.


401k Early Retirement IS Possible

You can access money in your 401k without early withdrawal penalties after you reach age 59 1/2.

Earlier than that: You can access money in your 401k for income if you stop working in the year you reach age 55 or after, without the 10% penalty. (Update: I am doing this now.) This is because there is an exception that allows for retiring early.

This exception does not apply for IRA accounts, and this is why it may not be right for you to roll over your 401k if you plan to retire before age 59 1/2.


Don't Forget the Taxes

20% tax

There is a requirement that 20% of 401k withdrawals be withheld for income taxes, but you may qualify for a refund when you file your tax return for the year.

This rule is much simpler than the early withdrawal IRA rule, so think carefully before you rollover 401k accounts to IRAs. Important: Money from 401k and IRA retirement savings accounts is always subject to regular income tax since we didn't pay any tax yet on this money.

Click to read more about 401k Withdrawal Planning

If you're like me, you probably have your retirement savings in multiple accounts. A 401k plan here and there, and maybe an IRA or two. Or maybe you have a pension or annuity benefit, too.

Should these be consolidated somehow? Or should you simply remove x% from each of them. For example, follow the 4% rule that should preserve your principal and keep up with inflation? (Not necessarily)

If you aren't completely sure of what you should do for your specific goals, consult a fee-based financial advisor!

Your advisor can analyze your financial plans and make projections that really help with your comfort level.


401k withdrawal analysis

401k Early Retirement or an IRA

Withdrawing from IRA Accounts

You can begin withdrawing from an IRA account after age 59 1/2 without paying a penalty. You will still pay income taxes on IRA withdrawals since you didn't pay taxes on this money when you put it in the IRA.

Before age 59 1/2, there are limits to what you can take from an IRA without being hit with an IRA early withdrawal penalty, even though there is a provision for early retirement.

For an early IRA withdrawal (before age 59 1/2) without owing the penalty, the provision requires that you follow a complicated process. Only "substantially equal periodic payments" also known as SEPP, are allowed for IRA accounts before 59 1/2.

You are allowed to take equal payments each year for at least 5 years or until you reach age 59 1/2 whichever is longer. You can start at whatever age you want as long as you meet this rule. (Another way to describe it is called annuitization.) Obviously, this can be tricky, so you must consult your financial and/or tax advisor.

See this page on the IRS site for all the complicated details.


I recently studied the returns I was getting from my various accounts and I found that my IRA account was doing very poorly.

The fees in that account were eating up any gains from the investment. That one definitely needs a change!

Pay attention to the IRS rules and if you are planning a 401k early retirement, make sure you do it right! You definitely want to consult a financial expert for guidance for your specific situation.

Be aware that the financial experts are humans like us and therefore sometimes make mistakes or don't know everything. So the more you know, the better you can assess the skill of those who may work on your behalf.