How to Take Money From Your Retirement Accounts Without a Penalty (and When You Should)

Saving up to retire takes decades of planning (and sometimes sacrifice), not to mention a steady income that allows you to put that money aside. Not everyone makes it to the finish line; in 2024, close to 5% of people with 401(k) plans took a hardship withdrawal, pulling money from their future to solve immediate financial needs. If you’re not yet 59½ years old (and don’t qualify for one of the exceptions allowed by the IRS) this can be a costly decision, though, because in addition to paying taxes on the withdrawal (which is considered income), you’ll be slapped with a 10% penalty.

But if you need to access your retirement funds a little early, there’s a way to do it without incurring the penalty—but it does come with some potential downsides.

Substantially Equal Periodic Payments

“Substantially Equal Periodic Payments (SEPP) is a method that allows individuals to withdraw funds from their retirement accounts before reaching the age of 59½ without incurring the typical 10% early withdrawal penalty imposed by the IRS,” says Sarah Daya, Executive Director of Wealth Planning and Advice at J.P. Morgan Wealth Management. “It could be a good option for individuals who are retiring early, or if you’re facing unexpected financial challenges and you need additional income to support yourself.”

A SEPP involves setting up annual distributions from a qualifying retirement account (like an IRA or a 401(k)—although you can’t use a 401(k) at a current employer) over a period of five years, or until the account holder turns 59½. That’s where the “substantially equal” part comes in—a SEPP isn’t a one-time distribution, it’s a schedule of more or less equal distributions over a period of time.

“The IRS has specific guidelines for how the SEPP is calculated and offers three methods for calculation that you can choose from,” Daya says:

• The Required Minimum Distribution (RMD) Method, which calculates the annual payment by dividing the account balance by your life expectancy based on the IRS’s tables; the annual payment is recalculated each year and can change from year to year.

• The Fixed Amortization Method, which calculates the payment by amortizing—in other words, distributing payments from—the account balance over a specified number of years, based on your life expectancy and a chosen interest rate; these payments remain the same from year to year.

• The Fixed Annuitization Method, which calculates the payment by dividing the account balance by an annuity factor based on a chosen interest rate and your life expectancy; the annual payment amount stays the same each year.

Which method is best for you depends on your specific financial needs.

SEPP downsides

If a SEPP seems like a magical way to tap that nest egg without penalties, Daya cautions that there are some downsides.

“A SEPP lacks flexibility,” she says. “You cannot change the payment amount or the schedule once you start—once you start a SEPP, you must continue withdrawals for at least five years or until you reach age 59 ½, whichever is longer. Changing the payment schedule or stopping the withdrawals before the five-year period ends can result in penalties.”

Another consideration is taxes, which you will have to pay on the distributions like you would on any income. And SEPPs aren’t easy to figure out, even if you handle a lot of your own finances and do your own taxes. “Calculating the SEPP payment amount is very complex,” Daya says. “You should consider working with a financial professional to help you meet all of the IRS’s compliance rules.”

Perhaps the most important consideration is the effect a SEPP will have on Future You. “Making early withdrawals through a SEPP can reduce the amount of funds available for their later retirement years,” Daya says. Every dollar you take today is a dollar you won’t have when you officially retire.

The SEPP option

Setting up a SEPP can be a good idea if you are retiring early and need access to your funds for your living expenses. If you have no other income or the income you do have is insufficient, a SEPP can bridge the gap between today and official retirement. And if you need regular income over a long period of time due to an unexpected financial challenge, a SEPP might be a good way to provide that.

But the inflexibility, cost to your future, and tax bill means a SEPP should be a kind of last-resort solution.

“They are not for short-term emergency expenses,” Daya says. “A SEPP is a way to provide a consistent income stream over five or more years. Everyone’s financial situation is different, and whether a SEPP makes sense for you will depend on a number of personal factors.”

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