New IRS Rules for Early Withdrawals

Withdrawing money from a retirement account before age 59½ typically comes with a 10% early withdrawal penalty. One way to avoid the penalty is by taking "substanially equal periodic payments" (SEPP). Once payments begin, they must continue for five years or until you reach age 59½, whichever is longer.

The Old Rules

In the past, withdrawals were based on your life expectancy plus a rate of interest that could fluctuate each month. The changing interest rate made budgeting difficult.

The New Rules

In January 2022, the IRS set the base interest rate as any rate that is not more than five percent. The ruling means that individuals who choose to make withdrawals under a SEPP arrangement can make larger withdrawals with more predictable payments.

Other Ways to Avoid the Penalty

A SEPP arrangement isn’t the only way to withdraw funds from retirement accounts without incurring the 10% early withdrawal penalty. Depending on your personal circumstances, you can:

• Withdraw up to $10,000 from a traditional IRA for a first-time home purchase. If you’re married, your spouse can also withdraw $10,000 from his/her own IRA.


• Take Qualified Education Expense withdrawals from a Roth IRA to pay qualified education expenses for yourself or your dependents.


• Withdraw money from an IRA to pay unreimbursed medical expenses that exceed 10% of your adjusted gross income.


• Withdraw funds from an IRA to pay health insurance premiums if you lose your job and collect unemployment benefits for at least 12 weeks.


• Take an IRA distribution to supplement SSDI benefits for a disability whose severity is confirmed by a physician.


• Take a 401(k) loan for the lesser of 1) $10,000 or 50% of your vested account balance, whichever is larger, or 2) $50,000.


• Withdraw money from an inherited IRA before age 59½, but you’ll owe income taxes on the withdrawal.


• Withdraw contributions — but not earnings — from a Roth IRA.

Ideally, money should remain invested in your retirement accounts until you’re ready to use it in retirement. However, as a last resort, you do have options for making penalty-free early withdrawals if you absolutely need the funds.