Personal Finance

I'm already retired in my mid-30s but can't access my 401(k) or Roth IRA yet — what are my options?

Rich Duprey

Published: January 6, 2025 8:41 am

Retiring early is the goal of many. Putting aside money every paycheck and letting it grow untouched allows the power of time and compound interest to work their magic. Do it enough and you can achieve your goal of financial independence and early retirement.

But saving money is only half the equation. Accessing it early if you retire is a whole different issue. Retirement programs are designed for traditional retirement and prevent you from spending money early. Withdrawing the money before you turn 59-1/2 will subject you to a 10% penalty, plus taxes. Particularly for early retirees who have accumulated a substantial amount of money, this can be a sizable financial hit.

24/7 Wall St. Key Points:

• Retirement programs like 401(k)s have been an immense help to individuals putting away money for their retirement.
• Unfortunately, they are set up with traditional retirement timelines in mind and people looking to retire early have unique needs that need special strategies to access their money.
• Also: Is your 401(k) optimized for your retirement plans? (Sponsored)

The situation

This was brought to mind by a Redditor on the r/fatFIRE subreddit who at 30 years old had saved enough for his early retirement. While he felt financially secure after reaching the traditional retirement age, the 30 years beforehand left him worried he wouldn’t have enough money to survive.

Now I’m not a financial advisor or tax professional, so these are only my opinions, but here are three strategies to use to access your money in tax-advantaged accounts early. It is best to consult with professionals before deploying any strategy.

Roth conversion ladder

A Roth conversion ladder is a strategic financial maneuver that enables early retirees to access their retirement funds ahead of schedule without penalty. You convert funds from a traditional IRA or 401(k) into a Roth IRA in staggered amounts over several years. Each conversion requires waiting five years before you can withdraw the converted funds tax-free and penalty-free.

The key advantage of this strategy is the ability to manage tax liability by spreading conversions across years, potentially keeping you in a lower tax bracket. For example, if you plan to retire at 50, you might start converting a year’s worth of living expenses annually at 45. By 50, the first conversion would be accessible, providing a stream of income.

This method is particularly useful for those who anticipate needing funds before traditional retirement age, but wish to avoid the 10% early withdrawal penalty. However, it requires careful planning to ensure there are sufficient funds for both early retirement and later years.

Substantially equal periodic payments (SEPP)

Substantially Equal Periodic Payments (SEPP) is another alternative method for accessing retirement funds before the typical retirement age of 59-1.2 without facing penalties. Under IRS Rule 72(t), SEPP allows you to take regular, calculated withdrawals from your IRA or 401(k) based on your life expectancy. 

This strategy requires commitment because once you start you must continue these payments for at least five years or until you reach 59-1/2, whichever is longer.

The calculation methods for SEPP include the Required Minimum Distribution (RMD), Fixed Amortization, and Fixed Annuitization. Each offers different payment amounts based on life expectancy, interest rates, and account balance. This approach can be beneficial for early retirees needing income, but should be approached with caution. Modifying the payments before the period ends can lead to penalties on all previously withdrawn funds. It is essential to consult with a financial advisor to tailor SEPP to your financial situation before employing this option so that you don’t deplete your retirement savings too quickly.

Pay the early withdrawal penalty

Although avoiding paying penalties is the goal, sometimes it may be a viable option. Although it seems counterintuitive, under certain circumstances it can be beneficial . 

First, it provides immediate access to funds in emergencies or when no other financial resources are available. If you’re facing unexpected medical bills, significant home repairs, or are in dire need of cash flow due to unforeseen circumstances, the penalty might be worth it.

Second, when investing in a high-return opportunities or paying off high-interest debt, the long-term financial gain or savings could outweigh the penalty’s cost. For someone with a short-term financial goal or nearing the end of their working years, where the impact of lost compound interest is minimal, using retirement funds might be strategically sound. 

Moreover, the tax implications might be more favorable if one’s income is lower during the withdrawal year, potentially reducing the overall tax burden. However, this strategy should be approached with caution, considering the long-term implications on retirement savings.