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How to Get to Your Money Before Age 59 1/2

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Saturday Selection: How to Get to Your Money Before Age 59 1/2


This classic post from Dr. Jim Dahle originally appeared on The White Coat Investor. It is of particular value to the aspiring early retiree. Yes, Virginia, there is a way to get to that retirement money.

If you read the fine print on your IRAs, 401Ks, and 403Bs, you’ve probably discovered that the government wants you to use the money for retirement, and also that the government feels that retirement shouldn’t start before age 59 1/2.  But what if you want to retire before age 59 1/2?  How can you get to your money without that pesky 10% penalty that comes with taking money out before age 59 1/2?

But what if you want to retire before age 59 1/2?  How can you get to your money without that pesky 10% penalty that comes with taking money out before age 59 1/2?  Here’s a few tips the pros use:


# 1 Burn Your Taxable Account First


Your taxable account is your least tax-efficient way to invest.  Yes, it has its tax benefits, but these pale in comparison to IRAs and 401Ks, especially when you consider the additional estate planning and asset protection benefits of a true retirement account.  Most experts agree that an early retiree ought to hit up his taxable account before diving into his tax-protected ones for a number of reasons.  First, you don’t pay any tax on your basis, which might be quite high.  Second, long-term capital gains are only taxed at 5-15%, likely much less than your IRA withdrawals.  Last, it leaves your IRA money to continue to compound at tax-free rates.

[PoF: Long-term capital gains are typically subject ot state tax, as well, but federal tax can be as low as zero under the current tax code as long as your taxable income is under about $75,000 for a married couple filing jointly.]


# 2 Drain that 457


A 457(b) is a tax-protected account available to many docs who work for university hospitals.  If you have a 403B you ought to look and see if you have a 457 too.  It allows you to squirrel away another $16,500 a year into a tax-protected account.  It’s biggest downside is that the money is technically subject to your employer’s creditors.  But that comes with several upsides.

First, it gives you a tax-break just like a 401K or 403B.  Second, it isn’t subject to YOUR creditors.  Lastly, you can raid it as soon as you separate from your employer without having to worry about the age 59 1/2 rule.  In fact, you probably should since it isn’t quite as separate from your employer’s money as your 403B account is.  If you don’t want to spend the money, you can also roll it into an IRA.  That, of course, makes it subject to the Age 59 1/2 rule, so don’t do it if you want to spend the money before then.

[PoF: WCI is referring to a governmental 457(b), which can be rolled over into an IRA. If, like me, you work for a non-governmental non-profit hospital, you may have a non-governmental 457(b), which can also be accessed at any age after you leave the employer, but cannot be rolled over into an IRA.

You often can roll over money in a non-governmental 457(b) to another non-governmental 457(b).]


# 3 Take Advantage of the SEPP Rule


The Substantially Equal Periodic Payments (SEPP) rule is the little-known exception to get into your IRA as soon as you retire.  You basically “annuitize” your IRA from the time you retire until 59 1/2.  Your life expectancy is calculated, and you then must take out an equal amount each year equal to the balance of the IRA divided by your life expectancy.  Once started, you must continue to take these withdrawals for at least 5 years, or until age 59 1/2. When you do this, you DO NOT have to pay the penalty (but of course do have to pay taxes due on a tax-deferred account.)


# 4 Don’t Forget the Exceptions to the Age 59 1/2 Rule


Per IRS Publication 590, you can take out the money without paying the 10% penalty for the following reasons:

  • Unreimbursed medical expenses > 7.5% of your adjusted gross income (which may not be that high if you’re retired)
  • Pay for medical insurance
  • Disability
  • Inherited IRAs. (if your father leaves you his IRA, you can take out the money before you get to 59 1/2)
  • Qualified Higher Education Expenses- for you, your kids, or your grandkids
  • A First Home.  Keep in mind the IRS definition of a “first home” is that you haven’t owned one for the last 2 years.  Also, it doesn’t have to be YOUR first home, it can be your kid’s or grandkid’s first home too.  See how this works?  You pull out $10K from your IRA to pay toward their home, and they gift you $10K for Christmas.  No 10% due.  Ethical?  Perhaps not.  Legal?  Certainly.  Keep in mind there is a $10K limit.
  • IRS Levy
  • Reservist Distribution.  A military reservist can withdraw money while activated without paying the 10% penalty.


POF 1st Home
we could have paid for this with our 401(k)


[PoF: I’ll add another. Your 401(k) can be accessed penalty free anytime during or after the year in which you turn 55 if you separate from your employer. You lose that benefit if you roll the 401(k) money over into an IRA.]


# 5 Don’t Forget the Stealth IRA (Your HSA)


Although after age 65, an HSA can serve as just another IRA, withdrawals for qualified medical expenses are always tax and penalty free.


# 6 Roth IRA Contributions

Unlike traditional IRA contributions, and earnings on either type of IRA, all contributions to a Roth IRA can always be taken out tax and penalty-free.  In fact, some people even use their Roth IRA as an emergency fund initially because of this.  This applies even to Backdoor Roth IRAs, which is the only way most practicing physicians can make these contributions.

However, I would be hesitant to touch a Roth IRA any earlier than you have to.  Those tax and penalty free distributions are tempting, but keep in mind that in terms of maximizing your estate, the Roth IRA is the LAST account you would want to touch.  A stretch IRA is super valuable to your heirs.

Ally Bank
# 7 401K Loans


All right, I can’t really recommend this one.  The problem with a 401K loan is that you have to pay it back immediately if you separate from your employer, which is kind of the point of retirement.  But it does allow you access to your money before age 59 1/2…as long as you keep working at least part-time.


# 8 Cash Value Life Insurance


This is another one I can’t recommend.  If you were suckered into a cash value life insurance policy years ago, and it now makes sense to keep it (as it often does AFTER 10-20 years), the cash value can be accessed to pay for early retirement expenses without any concern about taxes or penalties.  Life insurance salesmen LOVE to point out this benefit of their policies.

Despite this benefit, life insurance is still a lousy investment due to the high fees, poor returns, and overly expensive insurance components so don’t go buy a policy to fund your early retirement.  You’re likely far better off with a plain old taxable account invested in index funds.  Don’t mix insurance and investing.



What do you think? When do you plan to retire? What resources will you use first in retirement? Comment below!

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33 thoughts on “How to Get to Your Money Before Age 59 1/2”

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  8. Lookup the IRS rule of 55 which allows you to get to your last employer’s 401k without penalty if you quit or lose your job between ages 55 and 59.5. If you are lucky, your last employers might allow rollovers into their plan. I was able to rollover 401ks from 4 previous employers into my current one and can pull the trigger come jan 1st.

    • I’m surprised Dr. Dahle didn’t include that one here. I’ve written about it elsewhere.

      You can actually access the money when you’re 54 (in the year in which you turn 55). If your birthday is 1/1, that doesn’t do you much good, but if it’s 12/31, you can access it a day after your 54th birthday.

      Cheers to your ability to pull the trigger soon (or now)!

  9. There is the “Rule of 55,” which I fall under. If your institution you retired from allows it, you can take 401k and 403b withdrawals if you were 55+ the year you retired. But you can’t do it if it’s rolled over to another account.

  10. Rule #3, Substantially Equal Periodic Payments, is IRS rule 72 (t) for those of you who want to reference it. If you are interested in leaving medicine early, you will want to read my upcoming book, “The Doctors Guide to Smart Career Alternatives and Retirement.” It should be available in June. I wrote this in response to the many doctors who are ready to change professions or retire. I left medicine at age 54 and plan to be using this rule for the next five years myself. You can read about my experience of early retirement, which I have called repurposing, and it may help you with your transition.

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  12. Excellent point on the medical insurance one. That’s actually new since I wrote the post. But you can take an amount out of your retirement accounts equal to your medical insurance premiums every year without having to pay penalties on it.

  13. Great list PoF!

    I’m actually going to be accessing my 401(k) using a Roth IRA Conversion Ladder once I quit the 9-5. It’ll be 5 years before I can actually start using the funds, but it will be penalty-free and I’ll use my taxable accounts and rental income to cover our expenses during that time.

    — Jim

  14. Really like how well you organized this information.
    I think that 10% penalty should be put into a little perspective for some.

    Those who want access to their qualified accounts may consider just paying that 10% because, in fact, you may not be losing a real 10%.
    Assuming you have been invested for 10 years and have had average market growth, taking out tax-savvy chunks every year until age 60 would still put you ahead despite the 10% penalty.

    • True Dr. Mo, but there may be a better way. Start Roth conversions 5 years before you need the money, and convert some annually. Then, you can take the Roth conversion money out annually (after it has “seasoned” for 5 years) penalty free. The so-called Roth conversion ladder.


  15. This is the biggest problem I’m having with my early retirement plan. Most of my net worth is in deferred accounts. The guidance in the FIRE world at a high level is 401k, then Roth and then after-tax. My after-tax balance isn’t growing as fast as it’s the last place I’m putting money. I’m thinking I need to shift more of my savings percentage to after-tax to have enough funds available prior to 59.5. Is there a rule of thumb on what percentage of your overall net worth should be in after-tax? Is there a threshold to where one would stop or slow down on contributing to a deferred account and focus more on after-tax?

  16. I forgot about this one, “Pay for medical insurance”. That’s a good one to remember. I also think the SEP rule is a good one for some folks. And it is surprisingly not known by most people.

  17. I have some questions about the 457. Like you I work for a nonprofit, nongovernment hospital with a 457.

    If you change jobs to a new hospital that doesn’t have a 457, should you withdraw your 457 and just put it in a taxable account? Assuming, 1. that your previous hospital is financially stable and 2. that you don’t have access to a new 457.

    • That’s a tough spot to be in. Different plans have different distribution rules. You may not want to take it all at once in a lump sum because you’ll pay taxes at your marginal tax rate. If you can take it a little bit at a time, that might be better. If you can delay payments from starting until you’re fully retired, that could be idea.

      There is always the risk that the employer goes under, in which case you could lose some or all of it, too. Very rare, but you never know.

  18. Some of the tips are very good, like burning Taxable account first and don’t touch IRAs and 401(k)s, but I would question the last three tips.
    401(k) loans, yes sometimes it works good on paper, but in reality, especially if you leave your employer.
    Cash Value Life Insurance – considering the price difference, I’d rather buy term life insurance and invest the difference

    • Don’t question the author too much. He noted in the post that he doesn’t recommend those two either. But they do allow you to avoid the 10% penalty, which was what the post was about.

    • There is an important caveat not covered in the post. In order to avoid the penalty, you must also apply for and receive unemployment benefits for at least 12 consecutive weeks first.

      You can’t just routinely draw the 401(k) down to pay your premiums because you chose to retire early.


      • Good point about the 12 weeks of unemployment requirement.

        Another way to get money out is to use your one time IRA to HSA rollover and then use that on your healthcare expenses.

  19. These are great tips-my husband isn’t on board with FIRE, so I’m focusing on achieving FI while still keeping RE as an option in the event that something changes in the future. This is primarily through retirement accounts right now so it’s great to have some options that will allow us to pull out some of the money if that ends up being the case.
    It’s really important to note on the SEPP that the requirement is the later of 5 years or 59 1/2 years old. An early retiree would have to commit to a considerable amount of time receiving the SEPP.

  20. As part of #1, remember you could “turn off” dividend reinvestment and have your dividends roll into a cash management account to use. Depending on the size of your taxable account, the dividend income could be significant. You are paying taxes on this year’s dividends this year anyway, so accessing the dividends from your taxable account is completely neutral to your long-term tax plan.

    • I do this now. I manually reinvest the dividends, but if I had a need for cash, it’ll be there once a quarter.

      I redirect dividends to a money market fund in case I were to take advantage of tax loss harvesting within 30 days of a dividend payment. I don’t want an inadvertent wash sale. Learned this the hard way a few years ago. It wasn’t much of a wash, but still…


  21. This is a great guide for the FIRE community. Some of these ideas do require careful implementation. For example, the math behind the SEPP rule can be a bit confusing.

    I was suckered into a permanent life policy. Luckily, I joined the PF community to confirm my permanent life policy was a bad idea. I took my $12k cash value and started a taxable account!

    • Good for you! I’ve become convinced that a taxable account is one of the best things we can create for early retirement. No, it doesn’t have a ton of tax advantages, but it gets an “A” for accessibility!

    • True. Many of us work for non-profit hospitals that are not government-affiliated. I have a 457(b) and plan to drain it like a swamp within my first five years or so of early retirement, but I do not have the ability to roll it over into a 401(k). If I did, I would, and slowly convert it to Roth.

      I won’t mess with the original post of WCI’s, but I’ll make an addendum.


  22. I love these tips. I definitely plan to tap my roth IRA contributions after I have used all my taxable accounts. There are so many loopholes at this point that it shouldn’t be a huge deterrent to get the money that you need in retirement 🙂


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