How to Access Retirement Funds Early

How To Access Retirement Funds Early

I’ve written a lot about the benefits of tax-advantaged accounts and why they are especially beneficial for people planning on retiring early.

I’ve even created a real-time experiment to prove that utilizing tax-advantaged accounts is the best way speed up your journey to financial independence.

What I haven’t done yet though is write a comprehensive post about all the ways you can access the money in retirement accounts prior to standard retirement age.

Today, I plan to fill in that missing piece of the puzzle and also determine which early-withdrawal method is best for early retirees.

Early-Withdrawal Penalty

The problem with tax-advantage accounts is that you could be forced to pay a 10% penalty when withdrawing your money before you turn 59 1/2 years old.

Since these accounts are for retirement (in the normal sense of the word), the penalty is the government’s way of discouraging you from spending the money early.

Luckily, there are loopholes you can exploit to get around the penalties so you can access this money during early retirement.

Standard Retirement is Part of Early Retirement

Before we dive into the various withdrawal methods though, it’s worth stating something obvious that people seem to miss.

Normal retirement is part of early retirement.

Here’s a highly-detailed diagram to help explain this even further:

Standard/Early Retirement

People have said to me that they aren’t contributing to their 401(k)s because they plan on retiring early. That’s insane! Even if you plan to retire early, you still need money to live on in your 60s, 70s, and beyond so why not pay for those years with tax-deferred (or potentially tax-free) money?

Everyone should utilize retirement accounts for standard-retirement-age spending but for people who think they’ll have more in their retirement accounts than they’d ever be able to use after they turn 60 and want to start accessing that money during early retirement, here are your options…

Roth Conversion Ladder

The first method for accessing tax-advantaged money early is the Roth IRA Conversion Ladder.

Here’s how it works…

  1. When you leave your job, immediately roll your 401(k)/403(b) into a Traditional IRA. Since all of these accounts are very similar, tax-wise, this conversion can be done immediately and there are no penalties or tax consequences to worry about.
  2. If you think you’ll need to access some of your retirement account money in five years, convert the amount you think you’ll need from your Traditional IRA to a Roth IRA. You will pay tax on the amount you convert so make sure you’re in a low tax bracket when performing the conversion and only convert as much as you need.
  3. Wait five years. While you’re waiting, you can do additional conversions so that you have money to access in years 6, 7, etc.
  4. After five years, you can take out the amount you converted without paying any additional penalties or taxes (you were taxed in Step #2 when you executed the Traditional-to-Roth conversion).

Here’s a sexy graphic I created that lays out the process:

Roth Conversion Ladder

I know people often try to explain these concepts on forums and elsewhere on the internet so here’s a direct link to this image, in case you want to share it:


The pros of this method are:

  • You can minimized your taxes because you can choose which years you do the conversion based on your income in those years. If your income is low enough, you could potentially execute tax-free conversions, which would mean you will never have to pay any tax on that money!
  • If you don’t need to use the money, you can leave the conversions in your Roth to grow tax free until you do need to use them.


  • You have to wait five years after executing the conversion to withdraw the money without penalty.
  • You pay tax on the conversion five years before you can use the money so you lose out on the tax-free growth that money could have provided.

72(t) Substantially Equal Periodic Payments (SEPP)

Another popular early-withdrawal method is 72(t) Substantially Equal Periodic Payments (SEPP).

Here’s how it works:

  1. When you leave your job, immediately roll your 401(k)/403(b) into a Traditional IRA.
  2. Determine how much you think you’ll want to withdraw from your retirement accounts every year until you turn 59.5
  3. Calculate the three possible withdrawal amounts (see this IRS document for more info) and pick the one that is closest to the number you decided in Step #2.
  4. Speak with a tax professional to ensure that your Step #3 calculation were correct.
  5. Withdraw (and pay tax on) that amount every year. Depending on the method you used to calculate the withdrawal amount, you may need to adjust the amount you withdraw every year.
  6. (Optional) If you find that you need to withdraw more money or you don’t need to withdraw as much, you can change the IRS method you use to calculate your withdrawals only once so make sure you’re happy with your change.
  7. Continue making the withdrawals for five year or until you turn 59.5 (whichever is longer). If you stop the withdrawals or if you withdraw the incorrect amount, you could face steep penalties so definitely don’t do that!

Here is another sweet graphic, depicting the SEPP 72(t) process:

Substantially Equal Periodic Payments (SEPP)

And here’s another handy link specifically for this image:


  • You pay tax on the withdrawal in the same year you spend the money so your money can grow tax-free for as long as possible.
  • You can start withdrawals immediately after early retirement so if you don’t have a lot of money in taxable accounts to hold you over, you can start tapping into your retirement accounts right away.


  • 72(t) distributions usually require help from a tax professional to set up correctly.
  • You must continue withdrawals until standard retirement age, whether you need the money or not.
  • You must continue withdrawals, whether it makes sense to or not (which means you could be forced to sell when the markets are down).
  • If you stop withdrawals or withdraw the incorrect amount, you could be forced to pay a penalty on all 72(t) distributions you’ve received, even in previous years.

Pay the Penalty

Another method I didn’t even consider until recently is to just pay the 10% early-withdrawal penalty and take money out of your retirement accounts whenever you need it.

Since I try to avoid penalties whenever possible, I never considered this as an option but Joshua Sheats from the Radical Personal Finance podcast brought this strategy to my attention recently.

One of his podcast listeners suggested that even if you plan to pay the 10% early-withdrawal penalty, it still makes sense to contribute to tax-advantaged accounts over ordinary taxable accounts.

This is quite a surprising conclusion so to see if the listener’s theory was correct, he ran some numbers (listen to this Radical Personal Finance podcast episode to hear him describe this in more detail).

He then asked me to run some of my own numbers to see if I reached the same conclusion and I did. My analysis is described below and was a big part of the reason I decided to write this post.

So simply taking money out of your retirement accounts early and paying the penalty is a viable option and has the following pros and cons:


  • No advanced planning is necessary
  • You can access the money immediately, whenever you need it, and you don’t have to pay tax in advance.


  • You have to pay a 10% early-withdrawal penalty, in addition to the taxes owed.


There are a few other ways you can avoid paying the 10% early-withdrawal penalty that are worth mentioning briefly.

For example, you can withdraw retirement account money early if you become disabled or if you use the money to pay for education expenses or for a first-time home purchase. None of those strategies are particularly useful for early-retirement planning though so I won’t elaborate on them here.

You are also able to use IRA funds to pay for medical expenses that exceed 10% of your gross income so if you aren’t lucky enough to have access to the Ultimate Retirement Account, you could potentially use your IRA to pay for medical expenses during early retirement (although you’ll still have to pay tax on the withdrawals whereas you wouldn’t with an HSA).


Now that we’ve described the various options, let’s see how they stack up against each other by running some numbers on a hypothetical early-retirement scenario.


Imagine a 30-year-old woman who plans to retire when she turns 40.

Once she retires, she won’t need to access the money in her retirement accounts from age 40 to 45 but she’s going to need to withdraw $9,000 of her money per year from the age of 45 through to when she turns 60.

She’s in the 25% tax bracket during her remaining 10 working years and will drop down to the 15% marginal tax bracket when she retires.

She has $18,000 of pre-tax money to contribute to an account every year during her career so lets see what her options are:

Scenario 1 – Taxable

The first scenario is she just contributes money to a taxable account. This is the easiest option and what most people would do if they knew they needed to access that money before standard retirement age.

Since she’ll be taxed on the money before she puts it into the taxable account, she’ll only be able to add $13,500 ($18,000 – 25% tax) to her investments every year. She will also be taxed on the growth of those funds at 15%, since the funds are in a taxable account.

When she reaches 45 years old, she just starts withdrawing $9,000 per year and she doesn’t have to pay any tax or penalties because she already paid tax on that money before she contributed to the taxable account.

Scenario 2 – Traditional

In scenario 2, she contributes $18,000 to her Traditional 401(k) every year. Since 401(k) contributions aren’t taxed up front, her full $18,000 can be invested.

When she turns 45 and needs to access $9,000 of that money every year, she has a few options:

Scenario 2(a) – Penalty

Her first option is to just start withdrawing $9,000 every year starting at age 45 and simply pay the 10% early-withdrawal penalty.

Scenario 2(b) – SEPP 72(t)

Her second option is to set up SEPP 72(t) distributions to withdraw $9,000 every year, starting on her 45th birthday, that continue until she turns 60.

Scenario 2(c) – Roth Conversion Ladder

Her final option is to build a Roth Conversion Ladder.

In this scenario, she immediately converts her 401(k) into a Traditional IRA when she leaves her job at 40 and converts $9,000 every year from her Traditional IRA to her Roth IRA. That will allow her to withdraw $9,000 every year from age 45 onwards.

She will stop the conversions at age 55, because she’ll be able to withdraw her money after she turns 60 penalty free anyway so no need to pay tax on that money five years earlier than necessary.

Scenario 3 – Roth

In Scenario 3, she decides to contribute to a Roth 401(k) instead. With a Roth, her money is taxed before it goes in so she’ll only be able to invest $13,500 every year but that money will grow tax free and she’ll be able to take those contributions out whenever she wants (since she already paid tax on that money).


Here’s a graph to show how the various scenarios play out:

Early Withdrawal Strategies Graph

If you’d like to download the spreadsheet that was used to compute these results, just enter your email below to join the Mad Fientist email list and receive an instant download link!

Let’s break things down into the various stages of her career and retirement…

After Working Period

It’s not surprising what each scenario looks like after the end of her working career.

Scenario 1 – Taxable$177,523
Scenario 2 – Traditional$248,696
Scenario 3 – Roth$186,522

Scenario 2 (Traditional) is the winner, based on total dollar amount, because no taxes were paid upfront so all of the money was invested and was able to grow tax free.

Scenario 3 (Roth) is slightly better off than Scenario 1 (Taxable) because although both were funded with after-tax money, the Roth was able to grow tax free.

After 5-Year Conversion/Waiting Period

After the five-year waiting period, where she doesn’t need to touch any of her retirement account money but is no longer working, the winners are Scenarios 2a and 2b. This is not surprising because the money in those accounts has been allowed to grow tax free without being touched.

Scenario 1 – Taxable$248,986
Scenario 2a – Traditional (Penalty)$348,809
Scenario 2b – Traditional (SEPP)$348,809
Scenario 2c – Traditional (Ladder)$339,676
Scenario 3 – Roth$261,607

You can see that the Roth Conversion Ladder scenario (Scenario 2c) is slightly less than the other Traditional scenarios. This is because when converting money from the Traditional IRA to the Roth IRA, taxes are paid on the conversion so some money and earnings potential is being lost to the government every year.

Final Totals

Once our fearless fientist turns 60 years old, she will have contributed exactly the same amount of pre-tax money and withdrawn the same amount every year in each of the scenarios. The only difference is the type of account she’s contributed to so that’s the only factor affecting the final balances in her accounts at age 60.

Here are the totals:

Scenario 1 – Taxable$469,799
Scenario 2a – Traditional (Penalty)$672,827
Scenario 2b – Traditional (SEPP)$706,892
Scenario 2c – Traditional (Ladder)$691,465
Scenario 3 – Roth$504,620

Wow, what a huge range of values!

It’s important to mention what types of accounts the money is in, since $1 in a Roth is more valuable than $1 in a Traditional IRA (because you won’t have to pay tax when you withdraw from the Roth).

Scenario 1 – Taxable$469,799 in a Taxable Account
Scenario 2a – Traditional (Penalty)$672,827 in a Traditional IRA
Scenario 2b – Traditional (SEPP)$706,892 in a Traditional IRA
Scenario 2c – Traditional (Ladder)$604,046 in a Traditional IRA and $87,419 in a Roth IRA
Scenario 3 – Roth$504,620 in a Roth IRA

It’s hard to see a clear winner though, since the money is scattered across different types of accounts that are treated differently tax-wise.

To help make it all clearer, let’s add another assumption to our hypothetical scenario…

Let’s assume that our now standard-age retiree wants an additional $45,000 to use every year and she’s going to fund it by withdrawing from these accounts. She’s not worried about when the money runs out, because she has other money to fund her essential expenses, but she’d obviously like for the money to last as long as possible.

So how long would each of these accounts last?

Here are the ages at which her accounts will be completely depleted in each of the scenarios:

Scenario 1 – Taxable76
Scenario 2a – Traditional (Penalty)86
Scenario 2b – Traditional (SEPP)90
Scenario 2c – Traditional (Ladder)90
Scenario 3 – Roth79

Incredible! By contributing to a Traditional 401(k)/IRA and then doing either a Roth Conversion Ladder or SEPP 72(t) distributions, she could have almost 15 extra years of elevated income (when compared to simply investing in a taxable account)!

Surprising Conclusions

There are a few surprising conclusions here.

The first is that even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty! The Penalty scenario (Scenario 2a) has over $200,000 more than the Taxable scenario (Scenario 1) by age 60 and will provide an additional decade of elevated income during standard retirement!

The second thing that surprised me was that it’s better to do SEPP 72(t) distributions instead of a Roth Conversion Ladder.

Since you have to pay tax on the conversion five years in advance of accessing the money in the Roth Conversion scenario, you lose out on tax-free growth that you don’t in the SEPP scenario. That’s why the SEPP scenario has $706,892 by age 60 whereas the Conversion Ladder scenario only has $691,465. This makes sense but it’s just not something I’ve thought about before.

My Plan

Obviously this hypothetical example is not perfect, because it assumes consistent growth with no fluctuation year-to-year, but how do these conclusions affect my own personal plan?

Luckily, I’ve taken full advantage of all the pre-tax accounts I’ve had available to me during my career, even when I didn’t think I could get that money out early, so I’ll continue utilizing my pre-tax accounts whenever possible.

The way I’ve always thought about it is, the government only gives you one shot to deduct a big chunk of your current year’s income by contributing to retirement accounts (i.e. you can’t change your mind in 2021 and say, “Hey, I’d actually like to contribute to my 2016 401(k) now so I can lower my 2016 taxes.”).

If you don’t take advantage now, you’ll lose the opportunity forever. That’s why I take advantage of every single tax break I have available to me now and will worry about decreasing my taxes later when I start the withdrawal process.

One thing this exercise has made me reconsider is the SEPP vs. Roth Conversion Ladder choice. I had planned to forgo SEPP 72(t) distributions during early retirement, due to the strict rules and administrative headaches associated with them, but if I know I’ll need to withdraw a set amount from my tax-advantaged accounts every year, it makes sense to set up SEPP because this exercise has shown that it is the most tax-efficient way of accessing retirement-account money early.

My early-retirement withdrawal plan will definitely still include strategic Roth Conversions though. Whenever my income is low enough to execute completely tax free Roth IRA conversions, I will do it. And if I realize I’m going to need more money or if I’m starting to worry about RMDs (Required Minimum Distributions), I’ll increase the size of my conversions, even if it means paying a little bit of tax.

What About You?

How about you? Did these calculations surprise you? Will they cause you to change your strategy? What’s your plan for accessing your retirement account funds early?

Let me know in the comments below!

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