How to Withdraw Money From Your Retirement Accounts Without Penalty (and When You Should Do It)
Saving for retirement requires decades of planning (and sometimes sacrifice), not to mention a steady income that will allow you to save that money. Not everyone reaches the finish line ; in 2024 , about 5% of people with 401(k) plans took hardship withdrawals, taking money out of their future to address immediate financial needs. If you are under age 59½ (and do not qualify for one of the exceptions allowed by the IRS ), this can be a costly decision because in addition to paying taxes on the withdrawal (which is considered income), you will be subject to a 10% penalty.
But if you need to access your retirement funds a little earlier, there is a way to do so without incurring a penalty, but it does have some potential downsides.
Substantially equal periodic payments
“Secondary Periodic Payments (SEPP) are a method that allows individuals to withdraw funds from their retirement accounts before age 59½ without incurring the typical 10% early withdrawal penalty imposed by the IRS ,” says Sarah Daya, executive director of wealth planning and advisory at JP Morgan Wealth Management . “This may be a good option for people who are retiring early, or if you are facing unexpected financial challenges and need extra income to support yourself.”
The SEPP involves setting up annual distributions from a qualified retirement account (such as an IRA or 401(k)—though you can’t use a 401(k) with a current employer) for five years or until the account owner turns 59½. This is where the “substantially equal” part comes in: SEPP is not a one-time distribution, it is a schedule of more or less equal distributions over a period of time.
“The IRS has specific guidelines for calculating SEPP and offers three calculation methods you can choose from,” Daya says:
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The Required Minimum Distribution (RMD) method , which calculates your annual payment by dividing your account balance by your life expectancy based on IRS tables; The annual payment is recalculated each year and may change from year to year.
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The fixed amortization method , which calculates the payment by amortizing—in other words, spreading payments out—of the account balance over a specified number of years, based on your life expectancy and the interest rate you choose; these payments remain the same from year to year.
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The fixed annuity method , in which the payout is calculated by dividing the account balance by an annuity factor based on the interest rate chosen and your life expectancy; The annual payment amount remains the same each year.
Which method is best for you depends on your specific financial needs.
Disadvantages of SEPP
If SEPP seems like a magical way to use up those savings without penalties, Daya warns that it has some downsides.
“PSEP lacks flexibility,” she says. “You can’t change the payment amount or schedule once you start—once you start SEPP, you must continue making withdrawals for at least five years or until you turn 59½, whichever is longer. Changing your payment schedule or stopping withdrawals before the end of the five-year period may result in penalties.”
Another consideration is the taxes you will have to pay on the distributions, just like on any income. And SEPP is not easy to calculate, even if you manage a lot of finances yourself and pay taxes yourself. “Calculating the SEPP payment amount is very difficult,” says Daya. “You should consider working with a financial professional who can help you comply with all IRS compliance rules.”
Perhaps the most important consideration is the impact that SEPP will have on you in the future. “Withdrawing early through SEPP can reduce the amount of funds available for later retirement years,” says Daya. Every dollar you take out today is a dollar you won’t have when you officially retire.
SEPP option
Setting up a SEPP may be a good idea if you are retiring early and need access to your funds to cover living expenses. If you have no other income, or what income you do have is insufficient, SEPP can bridge the gap between now and formal retirement. And if you need regular income over a long period of time due to unexpected financial problems, a SEPP may be a good way to provide this.
But the inflexibility, the cost of your future and tax bills mean SEPP should be something of a last resort solution.
“They are not intended for short-term emergency expenses,” Daya says. “A SEPP is a way to provide a stable stream of income for five years or more. Everyone’s financial situation is different and whether a SEPP makes sense for you will depend on a number of personal factors.”