How to access 401K early (before 59.5 & avoid 10% penalty)

By Jimmy Turner, MD
The Physician Philosopher

I recently came across a guest post on ESI Money where the guest poster was piling money into their taxable account preferentially over maxing out their retirement account provided at work (401K). The reason wasn’t that the 401K had terrible investment options with high expense ratios, 12-b 1 fees, and active management. The reason the poster gave was that he was planning to early retire at age 40 and didn’t want to have to deal with the tax implications on how to access his 401K/403B prior to age 59.5 years old.  Today, we will discuss the options on how to access 401K early (before age 59.5) for those considering early retirement.

If this topic interests you, then stay tuned for another topic later this week that will discuss bridging the gap to 59.5 during early retirement.  This post only discussed accessing your 401K early.

First things are first

I did the work for you, and you can trust what you are reading. That said, I am anesthesiologist who lives by the “Trust but verify” way of life.  My sources for the information included in this post are included.

The consequence for taking money out of a 401K/403B early is a 10% penalty on whatever you take out. That is not an insignificant amount of money.

However, the real number for early retirement is not age 59.5, but age 55.  If you retire during or after the calendar year you turn age 55, then you can receive distributions without paying the 10% penalty for taking the money out.

That’s all well and good, but what if I retire at age 40 or 45 like the original poster from ESI Money’s interview?  Let’s dive in.

Exceptions to the 10% Rule: The Good, The Bad, and The Ugly

There are many exceptions to the 10% Rule.  I am going to lay them out for you. Some are good, some are bad, and some are ugly.  Everyone always want’s the bad news first. So, let’s discuss this in reverse order: the ugly and bad choices (to be thorough) before getting to the good stuff at the end.

The ugly choices

If the benefit is paid to a beneficiary on or after the death of the person participating in the 401K, the 10% penalty does not apply. So, option number 1 is to die.  That’s an ugly option.

Ugly option number 2 is that you can also avoid the 10% penalty if you are facing hardships such as disability, natural disasters that the IRS has given permission to use it for, or medical payments.  Not ideal, but good to know in case this happens to you.

Qualified Domestic Relations Orders (QDRO) also avoid the penalty. These aren’t good as they are the result of court mandated payments (alimony, child support, etc).  Not a good spot to be in.

The bad choices

If the IRS levies a tax/fine against you, this can be taken from your 401K without penalty.  Not a great situation, but better to pay it out of a 401K than your taxable account if it’s got tax benefits to it and you are retired.

The (possibly) good choices

So, those are some less than stellar options to access your 401k/403b early.  Let’s discuss some potentially better options:  Loans and SEPPs.


Dog in bed

If these ugly/bad choices scare you, then you could get back in bed and hide under the covers… or keep reading.

You can take a loan out of your 401K for another investment.   The loan amount can be up to 50% of your account balance or a maximum of $50,000 whichever is less.

You must pay it back in five years after taking the loan and it must be paid back in equal quarterly payments.

This one almost made it into the “bad” section, but I can see where it could be used for good.  Say, if you were using it to diversify your account with real estate.  This would allow you to access the money prior to age 59.5.  Generally speaking, though, I would not encourage you to do this.  I just wanted to point out that it is technically an option.

The best choices?

Roth Ladder Conversion

Full Time Finance pointed out an extremely important omission on my part, which is to mention Roth Ladder Conversions as an option to access your 401K early.  This is true (with a catch).

You can convert your 401K to an IRA upon retirement.  Then you can convert your traditional (pre-tax) IRA to a Roth IRA. The catch is that you cannot touch the money for five years after you convert because the government doesn’t want you dodging the 10% penalty in early retirement so easily.

For this reason, it may not work for you unless you have enough money to span that 5 year gap prior to accessing the money.  However, if you have the dough, then this is a great option.

If you want to read more about Roth Ladder Conversions you can check out posts by Route to Retire, Money Under 30, or Big Law Investor.

Substantially Equal Periodic Payments (SEPP)

The IRS states that if you take payments “as part of a series of substantially equal periodic payments beginning after separation from service” that you can avoid the 10% penalty.  The stipulations are the following:

  • The payments must be “substantially equal” and occur after leaving your employer.
  • They must not be altered or stopped for five years after payments begin or 59.5 (whichever is later).
  • You can determine your payment in three ways:  By calculating RMD’s for your age, using it as an annuity, or via amortization.

SEPP 1 Million Dollar Thought Experiment

Let’s break down these three different methods to show what they might look like. Here are the assumptions.  $1,000,000 in a 401K.  Retire at age 45.  Here is what the annual “equal payments” would be by each of the above calculators.

Required Minimum Distributions

After looking at the table to determine life expectancy from Age 45 (38.8), I then divide my total amount 1,000,000/38.8 = $25,773…. this is the annual amount.  So, each month I have to take $2,147.  I can access this money without getting hit by the 10% penalty.

This number is calculated each year.  For example, at age 58 the annual amount becomes $37,037 (or $3,086 monthly).

This allows me to pull this amount from my 401K each month until the age of 59 1/2 plus however much I need from my taxable account for early retirement without having to worry about the 10% penalty.  At age 59 1/2 I could use however much I wanted, because I’ve reached the age determined by the IRS.

Amortization/Annuitization Method

With either of these methods your total annual “equal payment” will be around $41,000 with the above assumptions.  This comes out to a monthly payment of $3,417.  Generally speaking, this would be the better option if I needed more monthly income that wasn’t coming from somewhere else.

Unlike the RMD, these payments stay the same over the years and do not change.  It only has to be calculated once.

You are allowed to change from one option to another (say from RMD’s to amortization), but you are limited to the number of times you can do this.

Take Home

So, if you want to access your money from your 401K/403B, retiring after the year in which you turn 55 works.  If you want access earlier than that, then you’ll likely have to either plan on saving enough money in your taxable or 457 account that you won’t need your 401K til 59.5 years old.  (More on this in a post coming later this week). Otherwise, you are left with a SEPP as the best option.

The take home point for the SEPP payments is that if you want to be able to access your 401K prior to age 59.5 (and want to retire before age 55), then the RMD method is the best method to keep your payments down so that you don’t deplete your accounts too quickly.  It’ll extend the amount of time that your taxable account lasts as well.

If this isn’t a concern to you, then the amortization/annuity methods provide a slightly higher amount of money each year.  This will, again, extend your taxable account so that it lasts longer.  After the age of 59.5 you can take however much you want from it.

At the end of the day, this post serves to say that you can access your 401K before the age of 55/59.5, but you have to think about it and have a plan in place to do so.  Otherwise, you’ll have to either depend on other sources to bridge the gap or succumb to the 10% penalty.

If you would like to read more on this, others who have also written on this topic include White Coat Investor, Physian On Fire, Mad Fientist, and DoctorofFinanceMD.

If you plan to FIRE, what’s your distribution plan?  Are you going to rely on a massive taxable account? Roth money?  Is a SEPP part of your plan? Leave a comment below.



IRS publication on distribution penalties for 401K/403B and distribution rules
Calculations for three different payment methods for SEPP


  1. FullTimeFinance

    I think it’s be even better to do a conversion to a Roth with it. Wait five years and it’s accessible.

    Also after some number of years the savings on cap gains from year to year and from tax changes will exceed the ten percent penalty.

    • ThePhysicianPhilosopher

      Oh, I am definitely a fan of Roth Ladder conversions in early retirement.

      Not sure how I forgot to mention that! Gonna add it it now. Thanks for catching that omission!

  2. SomeRandomGuyOnline

    Great review. I too am a fan of the Roth conversion ladder and will probably use that over the SEPP. Timing the conversions would also be important since you would owe taxes on the amount you convert.

  3. DocG

    Great overview. Thanks for posting! The Roth ladder is the best option if you can swing it!

    • ThePhysicianPhilosopher

      Anytime! I love the Roth ladders. At age 50 will plan to use my 457 to bridge the five years until I have access to the ladder that I started at the same time. Last five years til I have access to 401k will be mix of the ladder and 457 money. Have 18 years til then. So that might all change, but it’s what’s currently in the works.

  4. Jim @ Route To Retire

    Thanks for including me in this – very much appreciated!

    I’m excited to do the Roth IRA Conversion Ladder starting next year. I’ve been working on the planning for this for a while now and it makes perfect sense for early retirees. Like you said, though, the critical part is coming up with that 5 years worth of living expenses first while your conversion “bakes” before you can access it.

    — Jim

    • ThePhysicianPhilosopher

      Thanks, Jim! I appreciate the comment and for you stopping by. Feels a bit like meeting a celebrity 🙂

      Good luck with your ladder. Let us know how it goes.


  5. Drdacpa

    Nice Article..!! Thank for sharing the article on How to access 401K early (before 59.5 & avoid 10% penalty)..Enjoyed reading the article.Do keep posting such articles with readers.!


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