The Money Meets Medicine Podcast

7 Ways to Avoid the 59.5 Rule

By Jimmy Turner, MD
Host of Money Meets Medicine

Editor’s Note: After writing this article, a commenter on social media pointed out that I did not discuss the Rule of 55. This is an important consideration for those who define early retirement as “at or after the age of 55.” What the Rule of 55 states is that you can avoid the early 10% withdrawal penalty discussed in this article if you retire in the year in which you turn 55 or later. So, if that fits your situation, then keep this in consideration! Now, back to the originally written content…

You and I may not agree on the definition of early retirement. You may think it is before the age of 65, while I think it is before the age of 55. What really matters, though, is when the IRS says it is too early to retire and access your retirement funds. The 59 1/2 rule, often seen as an immovable barrier for the early retiree, is a 10% “tax” on those who want to retire before the age of 59.5 years old.

Don’t let this worry you, though. The 59.5 rule becomes less daunting with the right knowledge and tools at your disposal. Yet, many are unaware of the creative yet practical approaches available to access their hard-earned savings without falling prey to hefty penalties or jeopardizing their future security.

From leveraging different types of investment accounts to understanding unique withdrawal techniques, there’s more than one way to crack open your nest egg responsibly. And let’s be honest: who doesn’t relish the thought of enjoying their retirement on their own terms? Let’s take a look at how you can access your hard-earned retirement funds in early retirement.

Table of Contents:

Understanding the 59.5 Rule and Its Impact on Early Retirement

If you’re dreaming of an early retirement, you’ve probably heard of the 59.5 rule. This little gem can make or break your plans. In fact, if you don’t account for it, you might not save enough to retire by the age you want. Particularly, if all of your funds are tucked inside a 401K or 403B.

Let’s unpack it together.

The Basics of the 59.5 Rule

The 59.5 rule is the government’s way of saying, “Hey, we want you to save for retirement, but we also don’t want you dipping into those savings too early.” It’s like a financial speed bump. You can drive as fast as you want through this rule, but you are going to pay a price.

Here’s how it works: if you withdraw money from your retirement accounts before you hit 59.5 years old, you’ll likely face a 10% early withdrawal penalty on top of the regular income tax. This includes early retirement withdrawals from a 401K, 403B,

Consequences of Early Withdrawals

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Taking money out of your retirement accounts before 59.5 can be costly. Let’s say you withdraw $10,000 from your 401(k) at age 45. Not only will you owe income tax on that money, assuming it was invested pre-tax, but you’ll also be slapped with a $1,000 early withdrawal penalty.

But it’s not just about the immediate costs. By withdrawing funds early, you’re also missing out on the power of compound interest. That $10,000, if left to grow in your account, could be worth significantly more by the time you reach retirement age. Keep doing that year to year, and the early withdrawal penalty is costing you quite a bit.

Strategic Planning for Early Retirement

So, you want to retire early but don’t want to get burned by the 59.5 rule? Before we talk about tips and tricks for avoiding the 10% penalty, it is worth discussing exactly how you plan on going about retirement. Why? Because the situation where the early retirement gap – and the 59.5 rule – loom the largest is when you go cold turkey on the income you’ve been living off of for years.

The cold turkey approach to retirement simply means that you have saved diligently while building up enough of a nest egg to allow you to one day walk out of work, never to return. One month you are making an income from your job. The next month (and forever looking forward) your living expenses come from the nest egg you’ve built. You’ve quit cold turkey.

While this may be the traditional way to retire, it isn’t the only way.

Partial Retirement

Another option is to gradually reduce your work hours as you approach early retirement. This “glide path” approach allows you to adjust to a lower income while still bringing in some money. You can use these earnings, along with any savings outside of retirement accounts, to bridge the gap until you reach 59.5.

Early retirement doesn’t have to mean not working at all. Many early retirees find ways to earn income through part-time work, consulting, or starting a small business. Earning a bit on the side can give you some breathing room, letting you hold off on dipping into your retirement nest egg.

The way that I like to think about it involves the “25X rule,” which states that for every $1,000 you need to live on for retirement, you need 25X this amount ($25,000) saved in order to be able to live off of your investments and know they will last at least 30 years.

In this context, for every $40,000 of income you have coming in during your early glide path retirement from some other source outside of your nest egg, that is $1 million less that you need in your nest egg. So, for example, let’s say you decided you needed $3 million to be able to retire, because you live off of $120,0000 per year.

If you had a part-time job working one week per month that paid $40,000, then you’d only need to have $2 million in your nest egg to partially retire the other 40 weeks of the year until you hit age 59 and a half.

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While I could send you to check out the list of all of the exceptions to the 59.5 rule listed by the IRS (e.g. death, disability, and other unenjoyable ways to avoid the 10% penalty), it would be better if we discuss some more helpful ways to avoid the 10% penalty associated with the 59.5 rule.

If you do need to access your retirement funds early, here are a few strategies:

1. Utilizing Cash Reserves

One approach is to build up a cash reserve in a savings account or money market fund. You can use this money to cover expenses in the early years of retirement, giving your retirement accounts more time to grow.

Using the $120,000 example listed above, you might build up $180,000 in liquid cash equivalents to allow you to draw down money for the first 18 months in early retirement. Knowing that you have this money, you wouldn’t have to worry about the sequence of return risk (SORR) in early retirement. Regardless of market performance after retirement, you’d have a stash of cash equivalents stockpiled away to weather any storm (and the 10% early withdrawal penalty).

2. Diversifying with Taxable Accounts

While retirement accounts offer tax advantages, taxable investment accounts provide more flexibility. You can withdraw money from these accounts at any time without penalty, making them a valuable tool for early retirees.

Unlike traditional retirement accounts (401K, 403B, IRA, etc) a taxable brokerage account can be tapped into any time you desire, even well before 59 and a half years old. This flexibility is one of the biggest benefits of a taxable brokerage account.

3. The Benefits of a Partial FIRE Strategy

This was already discussed briefly, but it is one of the best ways to bridge the early retirement gap. So, it deserves to be on this list.

Partial FIRE (Financial Independence, Retire Early) involves reducing your work hours or shifting to part-time work rather than fully retiring. This strategy allows you to maintain some earned income, reducing the amount you need to withdraw from your retirement accounts.

4. Leveraging a 457 Account for Early Access

If you work for a state or local government or a non-profit organization, you may have access to a 457 plan. Unlike 401(k)s and IRAs, 457 plans allow you to withdraw money before 59.5 without penalty if you leave your job.

For this reason, some place their money preferentially into a 457 account because they plan to be able to retire early. However, don’t dive into a 457 account without considering the pros and cons of this account. If you have access to a governmental 457 plan (eg, you work for the state, VA, etc) then consider that like an extra 401K.

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However, if you have a non-governmental plan, you must recognize that not all 457 plans are built the same. Before investing in a non-governmental plan you need to read the plan documents and, specifically, look into three aspects of the plan: the distribution options, the investment options, and the financial viability of your institution (this money is at risk to creditors).

5. Implementing Roth Ladder Conversions

When you retire, your 401K or 403B will likely be rolled into an IRA. A Roth IRA conversion ladder involves converting a portion of your traditional IRA into a Roth IRA each year. You’ll pay taxes on the converted amount, but after five years, you can withdraw that money tax and penalty-free.

That’s worth reiterating – you must wait 5 years to access that money!  So, you still need five years of money saved up in early retirement (from the other steps mentioned in this list) to get you through the five years until you can access the money you have laddered.

6. Opting for Substantially Equal Periodic Payments (SEPP)

SEPP is a method that allows you to withdraw funds from your retirement accounts before 59.5 without incurring the 10% penalty. However, it requires you to take substantially equal payments for at least five years or until you turn 59.5, whichever is longer.

The IRS states about SEPP that if you take payments “as part of a series of substantially equal periodic payments beginning after separation from service” 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 must determine your payment in one of three ways:  By calculating RMDs (required minimum distributions) for your age, using it as an annuity, or via amortization.

The gist is that you can arrange for equal payments to occur for you from your 401K/403B for five years or until age 59.5 (whichever happens later).  This can provide some money if you need some not covered by the four above.

7. Making Use of Roth Contributions

If you have a Roth IRA, you can withdraw your contributions (but not the earnings) at any time without tax or penalty. This can provide a source of funds in the early years of retirement from any Roth contributions you have made over the years. For many, this may feel like a last resort as Roth money is often money that is left for last due to its value as an inheritance, but this is an option nonetheless.

Key Takeaway: 

Dreaming of retiring early? The 59.5 rule might seem like a roadblock, but it’s not the end of your journey. With smart planning and strategic moves, you can dodge penalties and tap into your retirement funds without stress. Think outside the box with cash reserves, Roth conversions, or even part-time work to keep your dreams on track.


So, the 59.5 rule isn’t the boogeyman of early retirement it’s often made out to be. It’s just a number, not a wall. With a bit of creativity and some smart planning, dodging those penalties while grabbing your retirement dreams earlier than expected is totally doable.

Note: If you are looking to learn more about personal finance, make sure to download your free copy of the best-selling book, The Physician Philosopher’s Guide to Personal Finance!

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