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4 Lucrative Loopholes That Can Get You Early Access to Retirement Funds

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Generally, when you save for retirement, your goal should be not to touch the money until you are actually retired. Sometimes, though, life gets in the way and you need to dip into your retirement savings a bit earlier than planned. The government, though, often imposes some pretty steep penalties for early access to these funds, potentially rubbing salt in the wound of having to deplete your savings early. That said, there are several loopholes you can look for that may allow you early access to your retirement savings without having to pay the price.

For more help with planning for retirement, consider working with a financial advisor.

Loophole 1: Rule of 55

Generally speaking, you get access to retirement income at age 59.5. If you retire at age 55 or later, though, you can access money from a retirement account at the job you retired from without penalty. Behold the Rule of 55.

This means that if you’ve reached age 55 and you think you have enough money to fund your entire retirement, you can do it without having to pay a penalty. This plan is dependent, though, on not just having enough money saved overall, but having enough of it in a workplace plan at your current job. You could have $2 million saved from a previous job and you still wouldn’t have penalty-free access to it until age 59.5. Therefore, this loophole is best for those who’ve worked at a job for a long time and have the majority of their retirement savings in a plan sponsored by that company.

Loophole 2: Legal Exceptions

There are a number of exceptions legally defined by the government where a person can take money from their retirement accounts without having to pay any penalty. These include:

  • Becoming permanently disabled
  • Paying for qualified higher education expenses
  • Buying your first home (maximum withdrawal of $10,000)
  • Paying for medical expenses costing more than 10% of your adjusted gross income
  • Paying health insurance premiums while you are unemployed

If you fit any of these, you likely qualify for a withdrawal without penalty, but make sure to check with your plan administrator. You still may owe taxes if the account is tax-deferred.

Loophole 3: Roth IRA Contributions

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With a Roth IRA, all of the money you put in has already been taxed. When you withdraw it in retirement, none of it is subject to taxes.

While you cannot withdraw any investment gains you’ve made until age 59.5, you can withdraw your actual contributions from a Roth IRA at any time. If you’ve contributed $4,000 a year for three years, you can take out up to $12,000 without any penalty — but you can’t take more, as that would eat into your earnings.

To use this strategy, you’ll need to make sure you know exactly how much of your account is contributions vs. earnings to avoid accidentally taking out too much.

Loophole 4: Substantially Equal Periodic Payments

Substantially equal periodic payments allow a saver to take money out of their retirement accounts, but by using this method you’re locking yourself into taking a big chunk out of your savings. For this reason, it is only recommended if your savings are significant.

Here’s how it works. Substantially equal periodic payments are taken annually and once you take one, you have to take them annually for at least five years or until you reach 59.5, which ever comes second. If you start at 45, you’ll have to take payments for nearly 15 years. If you start at 58, you’ll be taking the payments until age 63.

There is also a minimum withdrawal based on your age and total savings. You find it using the Single Life Expectancy Table. This table give you a life expectancy factor based on age. For instance, the life expectancy factor for age 45 is 41.0. Next, you take your total savings and divide it by this number — that gives you the amount you have to withdraw if you’re using substantially equal periodic payments. Let’s say you are 45 and have $300,000 in savings. Dividing $300,000 by 41.0 comes to about $7,317. You’ll have to take that amount out each year until you reach 59.5. If you fail to do this, the IRS will retroactively charge you the 10% penalty on all withdrawals.

The Bottom Line

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Generally speaking, keeping your retirement savings in your account until you retire is good practice. If you need access to it early, though, there are a few ways you can go about avoiding the penalties, provided you qualify.

Retirement Planning Tips

  • A financial advisor can help you prepare for retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re using a 401(k), make sure you take advantage of any employer match available. This is free money, don’t leave it on the table!

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