5 Ways to access retirement funds before age 59½

If you're like most people, you dream of retiring as early as possible. But what if you need to access some of your retirement funds before age 59½? Is that even possible? The answer is yes, it is possible—but there are a few things you need to know in order to do so. In this post, we'll walk you through the process of accessing your retirement funds before age 59.5 via 72(t) distribution, and we'll give you an example of how this rule changed in 2022. We’ll cover rule 55 distributions as well as ROTH IRA distributions, taxable accounts, and life insurance retirement plans. So read on to learn more!

72(t) Distributions

A 72(t) distribution is a withdrawal from a retirement account that is taken in equal payments over a set period of time. The money withdrawn can be used for any purpose, but the payments must be made at least once per year for five years or until the account holder reaches age 59½, whichever is longer.

A 72(t) distribution may be a good option for retired or early retired individuals who want access to their retirement account funds without having to pay the 10% early withdrawal penalty. However, it's important to note that taking a 72(t) distribution will reduce the overall balance of your retirement account and may have tax implications. As such, it's important to speak with a financial advisor before deciding if a 72(t) distribution is right for you.

How to Set Up a 72(t) Distribution From Retirement Funds

If you're interested in setting up a 72(t) distribution from your retirement account, there are a few steps you'll need to take. First, you'll need to calculate your “series of substantially equal periodic payments” using one of the three approved methods laid out by the IRS. All three methods rely on either life expectancy or mortality tables. The amortization and annuitization methods should have higher
payments compared to the RMD method. There are a number of variables to consider before deciding which method is right for you. Ultimately, you'll need to set up your distributions with your IRA custodian and commit to taking them at least once per year for five years or until you reach age 59½, whichever is longer.

In January 2022 Notice 2022-6 was released by the IRS effectively increasing the interest rate that can be used in your calculations to 5%. That is a big deal as the amount of penalty free distributions before age 59½ just went up. Lasty year, a 50-year-old starting a distribution in 2021 with a million dollar IRA could take out roughly 3.7% or 37000 a year for 10 years, but now in 2022 that number jumped to 60,000 thanks to the IRS changes. That’s an additional 23,000 that a retiree could potentially use to bridge the gap without being assessed the early withdrawal penalty.

It's important to note that while you can change your mind about taking a 72(t) distribution after setting one up, you will be subject to the 10% early withdrawal penalty if you do so. As such, it's important to be 100% sure that a 72(t) distribution is the right move for you before moving forward. It’s also important to consider splitting an IRA up into two IRAs, one to be the 72(t) IRA, and the other to cover unexpected expenses that might come your way.

Rule 55

What is the Rule of 55?

The Rule of 55 allows penalty-free withdrawals from retirement accounts like a 401(k) or 403(b) beginning at age 55. This only applies if you separate from service ( leave your job) during or after the year you turn 55. You can take as much money as you want out of your account without paying the 10% early withdrawal penalty that usually applies to retirement account distributions taken before age 59 ½.

How Does the Rule of 55 Work?

To use the Rule of 55, all you have to do is leave your job after you turn 55 (or age 54 if it’s a militaryaffiliated job). You can then take penalty-free withdrawals from any 401(k)-type account that was funded through your employment with that employer – including a traditional 401(k), 403(b), 457(b), and Thrift Savings Plan (TSP). Prior to starting distributions you can rollover your previous employer
401ks, IRAs, 403Bs TSPs etc into your current 401k plan. This will allow you to access it all via the Rule of 55.

Use Roth Contributions:

You can always access your Roth contributions, the money you put into the account, tax and penalty free. The earnings need to stay in there for at least 5 years before you can access them. In addition, they won’t come out tax free unless you wait until age 59½. It’s hard to think of using the Roth as it’s the one account type that can grow tax free and interest free. I put that in there because lovers of insurance might read this and argue that “LIRPS” Life Insurance Retirement Plans allow for tax free withdrawals, but they are not interest free nor are they premium free. A Roth is the one account that you don’t have to pay the government tax again or an insurance company premiums and interest. The Roth IRA is the king of all the account types in my opinion.

Cash Value Life Insurance

If you have been conned into buying a cash value life insurance policy and you have kept it for a while building up the value, then you have yet another option. Cash value can be accessed via loans from the policy. Hence the “LIRP” Life Insurance Retirement Plan. So rather than paying taxes to the government you’ll start paying interest to an insurance company who you’ve handsomely paid insurance premiums to for years.

In the end, life insurance is a poor investment with high fees, low returns, and expensive insurance components and riders. My advice is to use insurance for its intended purpose to protect loved ones or transfer wealth to loved ones and not to fund some future income need.

Your taxable account

The taxable account will have been funded with after tax money that you had extra and didn’t put into retirement accounts and real estate. This is simply extra money that you have stashed away to help bridge the gap between your freedom day and 59½ when you can access other retirement accounts without having to use the rules. You will pay taxes yearly on dividends and interest and capital gains you trigger via purchases and sales of investments. This money can be in a high yield savings account and invested in all sorts of options.

If you are looking to retire early, a 72(t) distribution or Rule 55 distributions may be the right options for you. The rules change on these early retirement options; the process is complicated and should be well thought out before starting. Our team of experts can help you navigate these waters and create a retirement plan that meets your specific needs. Reach out to us today to get started!