Early Retirement Hack: A New IRS Rule Lets You Withdraw More From Your Retirement Accounts Without Penalty

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The IRS recently made changes to the amount of money that can be withdrawn each year from retirement accounts before age 59 1/2. As with the increase in overall inflation, the reasonable interest rate permitted by the IRS for determining certain types of these distributions recently increased to 5% or 120% of the mid-term rate (currently 1.40%), whichever is greater. This effectively makes the amount of money each taxpayer can withdraw without penalty each year higher than before. These withdrawals are called substantially equal periodic payments.

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Substantially equal periodic payments allow you to take early distributions from your qualified retirement accounts without penalty, but with certain provisions. According to the IRS rules, you can avoid the 10% penalty rule on early distributions before 59 ½ with a SEPP plan in which money is distributed for a period of five years or until the you turn 59 ½ — whichever comes later. This means that once you decide to take distributions with this plan, you will have to continue drawing on the money until you fulfill one of the plan age requirements to avoid major penalties. 

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There are three different ways to withdraw money and stay within the SEPP rules. 

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For all methods in general, the important part to remember is that you will have to stick to whatever method you have chosen — which could backfire on you if you decide to take it too soon. For example, suppose you choose an amortization SEPP payment method starting at age 50. This means you will have to take distributions for almost an entire decade, even if you decide you took money too soon. Once you reach 59 ½, you will have emptied one of your accounts for almost ten years and will still be almost three years before the minimum claiming age for Social Security. 

The downside to this can be that you draw on your retirement accounts too much too soon and not have enough left over when your actual retirement begins. SEPP plans are potentially risky strategies that need to be approached with caution, as they can lead to a fast depletion of retirement funds, leaving a taxpayer ill-prepared for their important later years of life.

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