Question: Can you take "penalty-free" withdrawals from your IRA before age 59-1/2? Answer: Yes and no, so read on before hopping online to drain your IRA account.
So, can you think of any good reasons to tap your IRA account before age 59-1/2? Likely there are a number of good reasons you might be eying your IRA as it bounces up and down with years to go before you turn age 59-1/2. For example, you might see it as potential capital to start a business, as rescue capital, or (if you're in a really good place) as the start of an early retirement. Of course, there are a few good reasons for leaving it alone – heavy tax hits and penalties – and for that Forbes has recently offered some uncommon advice for withdrawing from your IRA early and penalty free.
Conventional wisdom says to leave your IRA alone until age 59-1/2, or else pay a 10 percent penalty on withdrawals. However, there are allowances for penalty-free distribution in the case of serious financial hardship, higher educational expenses, or even the cost of a first home. What is far less known is the 72(t) exception for Substantially Equal Periodic Payments (SEPP). Essentially, the IRS regulations allow "annuitization" of your IRA, so you can receive distributions straight from your IRA by taking them as a series of "substantially equal periodic payments." The payments, once initiated, act much like "required minimum distributions" because you must withdraw an amount determined by your life expectancy (or the joint life expectancy of you and your beneficiary) and at regular intervals, at least annually. Once initiated, you must take these distributions for 5 years or until age 59-1/2. Thereafter, you can either elect to reorganize your distribution pattern or hold off entirely until the actual required minimum distributions set in at age 70-1/2.
The process, as you would imagine, is fairly complicated and that alone probably accounts for its relative under-use. To see it in action, consult the original Forbes article (but even they found it simpler to reiterate the examples and information from the IRS’s FAQ). While tricky, and perhaps a little risky, understanding your IRA withdrawal options may offer some practical solutions to your early-retirement plans.