The Retirement Corporation of America

How To Withdraw Money Early — Without A Penalty

YOU DON'T WANT to dip into your retirement savings accounts any earlier than you must. You should avoid touching the money until you are 59 1/2 just to avoid getting hit with a penalty—as well as a tax liability at ordinary income rates.

And, of course, the longer you can go without "dipping," the better off you will be in your senior years. By then, the money from your retirement nest egg is likely to be paying a very big chunk of your bills.

Still, there are ways you can withdraw money if you absolutely must.

We've already mentioned the ways around the 59 1/2 rule (see Page 7 for more details). But there's another way money can be withdrawn from a tax-sheltered retirement savings plan before 59 1/2.

Another Approach You Should Know About

There is another way you can withdraw money before 59 1/2 without facing a penalty: By electing to receive your money in what the IRS calls "substantially equal periodic payments."

You might want to take this approach if you are planning early retirement and don't even want to wait to age 55 to begin withdrawing your money. You might take this approach to launch a post-retirement business and want capital to get it off the ground. Or maybe you are planning to move somewhere else in retirement and want to buy a house in the new location before you sell the family home.

The point is, you can withdraw money from a "qualified" retirement plan (meaning it qualifies for tax-deferral under IRS rules) if you follow the substantially equal periodic payments rule. To do so, you must meet three requirements:

•  Requirement #1: You must receive the amount withdrawn in a series of substantially equal payments paid out monthly, quarterly, semi-annually or annually.

•  Requirement #2: You must have left a job where you were a participant in a qualified retirement plan: 401(k), 403(b), 457, or defined benefit pension plan.

•  Requirement #3: The amount paid to you must remain fixed for at least five years, or until you reach age 59 1/2—whichever comes later.

How to Calculate How Much to Withdraw

You can't just hit on an amount taken from thin air and make that your substantially equal periodic payment. In fact, the IRS allows three different ways of calculating the amount you can withdraw:

•  Life-expectancy method. You divide the balance in your retirement plan by the number of years you can expect to live, based on IRS's life expectancy calculations. Those calculations are in IRS Publication 590, titled "Individual Retirement Arrangements," and is available at the IRS website (www.irs.gov). Since your life expectancy will change each year, so will the amount you can withdraw. Still, the amount withdrawn won't vary enough to move you away from substantially equal payments.

•  Amortization method. The amount you withdraw is based on your life expectancy and what the IRS considers to be a "reasonable" assumption of the interest rate you could earn on the money you withdraw. The IRS doesn't tell you what it considers to be a reasonable rate of interest on your money. Within certain limits, that's up to you to decide.

•  Annuity-factor method. This method is complicated, so you should consult a professional.

Summing Up Substantially Equal Periodic Payments

The life-expectancy method is the easiest to calculate, but generally delivers the smallest annual payment. The annuity-factor method generally delivers the biggest annual payment, but requires the help of a CPA, financial planner, or other professional to calculate. The amortization method fits somewhere in between. The payout is also somewhere in between the other two. You would probably need professional help to calculate the payout, but not as much help as you would with the annuity-factor method.

Just to be safe, if you are contemplating a very early retirement, and taking substantially equal periodic payments sounds intriguing, spend time with a financial professional to make certain it does make sense for you. If it does, work with the professional to make sure everything is done right.