HomeRetirementRetire early and withdraw from your 401k without penalty.

Retire early and withdraw from your 401k without penalty.

Remember that time I wrote a post about why I hate my Roth IRA and why I would probably never contribute to it ever again.

But then, like a week later, I wrote a follow-up post saying I still hate my Roth IRA, but I’ll probably keep contributing to it for the foreseeable future.

Or how about that time, a few weeks ago, when I wrote a post about having a ton of money available to me at retirement, maybe even too much?

But then my most recent post talked about how I was going to add even more to my retirement accounts, specifically my 401k.


This personal finance stuff can be confusing

What might sound good one week, may not be my cup of tea the following week.

With a government pension waiting for me on my 57th birthday, and social security kicking in shortly after, I’ve always just kind of resigned to the fact that I would work in to my late 50’s.

I mean, I’ll never make a huge salary in my line of work, so the idea of retiring early seemed like a foreign concept.


A Changed Perpective

But after reading J Money’s recent post on Early Retirement, and poking around with the spreadsheet he made, I found myself wanting to dig deeper.

According to J’s spreadsheet, if I change nothing about our spending (or saving) habits, I’m looking at being able to retire when I’m 45 years old. Check it…

early retire

Basically, the early retirement rule of thumb is you need to have 25 times annual expenses banked before you can retire.

Since our plan is to spend about $48,000 per year, we need $1.2 million stored away before I can call it quits. As soon as I hit that number, I can work my last day with reasonable certainty that I wont have to work ever again.

So the question remains, even if I had $1.2 million invested in my 401k right now, how could I possibly access those funds without paying the an IRS mandated 10% penalty for early withdrawal?


Introducing the IRS 72t withdrawal program. 

Without boring you to death, the 72t program allows an individual to withdraw an “equally substantial distribution” each year without paying a penalty.

Basically, if I have $1,200,000 in my retirement accounts by the time I turn 35 years old, I could take advantage of the 72t program and withdraw $56,420 from my 401k each year without paying a penalty.

There are, of course, a few catches to the 72t program. One of the most important being that you are required to continue making withdrawals until age 59 1/2 or for five years, whichever time period is longer. So no withdrawing some years, and not withdrawing others. It’s definitely a long term commitment for those that choose to retire early.

But hey, how bad can retiring early really be? 

Another big whopper for the program, is that if you modify your series of payments in any way, the 10% early distribution penalty is retroactively imposed on all money you’ve withdrawn. Ever. Yikes! That would be a very costly mistake.

Basically, once you pick an amount to withdraw each year (in this example $56,000), you have no wiggle room to withdraw any amount other than that from your 401k.

If you want to learn more about the 72t rule you can do so here

Some other things worth noting 

So far I’ve only been talking about withdrawals from my 401k, but as you all know, I’ve also been an avid contributor to my Roth IRA and most recently, a taxable investment account.

Having my retirement portfolio diversified across a number of avenues sweetens the pot. With the 72t rule and my example above, I was only allowed to take out $56,000 a year.

No more, no less. 

But what if I have Girl Ninja and I decide to buy a new car, or pay for Baby Ninja’s first year of college, or a potential future daughter’s wedding. Where is the money for those types of things going to come from?

My Roth IRA. Duh.

I’ll be able to use my Roth as a means to buffer any abnormal spending requirements. Because, as I’m sure you already know, Roth contributions can be withdrawn at any time.

Or in other words, I’d have about $75,000 of tax-free/penalty-free money accessible to me at any given time by my 35th birthday.


But wait there’s more. 

As you might recall from my post on Home Equity Lines of Credit, Girl Ninja and I have decided to stop keeping so much darn cash in the bank and begin throwing all our discretionary income in to our taxable investment account.

That’s right. Screw our savings account!

As our taxable investment account continues to grow, I can take advantage of all sorts of tax loop holes to to minimize my tax obligation on withdrawals, possibly even completely eliminating taxes altogether. Tax loss harvesting anyone? Or how about dividend investing? The loop hole list goes on and on.

Don’t believe it’s possible?

You’re wrong. Check out this inspirational blog post from a couple that paid NO TAXES in 2013.


It’s time you start drinking the kool-aid!

Like I said before, I’d always assumed early retirement was for two types of people.

Either the mega wealthy for obvious reasons.


People like Mr Money Mustache, who live such a frugal lifestyle that they spend less than $25,000 per year. (editor’s note: Nothing wrong with the frugal and resourceful lifestyle, I personally am just not as interested in giving up my vehicle, moving to a cheaper cost of living area, growing my own food outback, etc. I’m lazy in that respect and am willing to pay the premium for it I suppose.)

Now that I’m digging deeper and getting in to some of the nitty gritty aspects of personal finance, my eyes are open to a whole new way of thinking. While I might not be retiring at 35 like the examples above, I could see 45, or maybe even 40 being a real possibility. And I don’t know about you, but that sounds a heck of a lot better than retiring at 57 like I’d always planned on.


P.S. I’m aware the future will obviously have some expensive seasons ahead (multiple children in high school, potential house projects, big family vacations, etc), but we will also have seasons of reduced expenses or greater income(paying off our mortgage, kids moving out and becoming self-sufficient, Girl Ninja going back to work, pension, social security, etc). 



  1. Hey Ninja, glad you’re on board the early retirement train as well. I definitely also plan to use a combination of income from taxable accounts, savings, Roth distributions, and the 72-t to retire before 59.5.

    I agree that if you figure out distributions in an efficient manner, it’s very easy to pay little to no taxes when early retirement kicks in. That’s why I’m 100% in agreement with you that it makes sense for higher income earners to contribute to a 401-k, so you get the up-front deduction in the future, and then figure out how to keep your taxes low in retirement. One good way to doing this is the Roth Conversion and MadFientist has a great write-up on it (

    One final issue is the logic of the spreadsheet regarding inflation. If you want to match up what you need to retire in today’s dollars ($1.2MM), you need to factor in inflation. I think you make a reasonable assumption that your retirement portfolio will return 8% annualized per year, but about 3% or so will eaten away by inflation. You’ll either need to make your return (8-3 = 5%) or will need a second column that accounts for what that balance represents in today’s dollars. If you want $48k of today’s dollars per year, you’ll need about $1.92MM (=$1.2MM * (1.03^16)). That being said, hopefully you’ll need less than $48k of today’s dollars in the future since you won’t have a mortgage payment, which would reduce the nest egg needed.

    Looking forward to hearing more about the Ninja family’s journey!

    • Looking back, the stock market has actually had an average return of 10-11%/year. 8% is an inflation-adjusted percentage.

  2. Lol- I had to look up the charlie video on YouTube.

    Nice post. I’ll have to read more on the 72t form. Retiring at 35-45 would be great. 56k is a 4.67% withdraw rate, which I’m sure it’s still an acceptable percentage to make your nest egg last a really long time. Once you’re 57, your pension should kick in. Shortly after that, social security. At that time , you’ll be making more money at retirement than in your working days. Nice plan. Keep it up.

  3. Hey Ninja,

    Excellent post, but I am not a fan of HELOCs. Look at the financial crisis of 2008…many HELOCs were cancelled at the bank’s discretion. I personally like an emergency fund to be liquid and not at the mercy of another entity. I like it for worst case unforeseen scenarios – market crash and both job losses at once.

    Credit isn’t guaranteed, creditors can pull it at any time for any reason – and I don’t want to be SOL. Army life taught me that the worst and unexpected will happen, have multiple contingencies for security…a lesson well learned.

    Also, does your 401k allow for after tax contributions? If so, you can contribute and roll over all of your post tax contributions to the tune of an extra max of $35,000 per year.

    • They’ll still have access to their taxable investment account. Sure, principle isn’t guaranteed, but it’s quite liquid at the very least.

      • Sure they have access to it, but if a repeat of 2008 comes and the value is cut in half, liquidating assets at a loss is not a wise move. There really is no substitute for cash.

        • I used to think like you but after watching my $100,000 cash savings remain stagnant, while watching the stock market nearly triple a little piece of me died inside.

          We will keep $10,000 in savings for our emergency fund, but any more than that silly to me.

          While one could always argue it’s important to save more, no one ever got rich off their savings accounts. I’m willing to mitigate that risk and diversify my cash flow options with a HELOC.

          • $100k?!

            Wow a piece of me would have died too! We keep about 4.5-5 months in and have had to dip into it every now and again. It is painful to see all that cash only getting 1% in a “high yield” online savings account, but we have enough going into the market each month to justify the opportunity cost of the emergency fund.

            That plan makes sense, you have liquid cash and that HELOC will more than likely be adequate for your needs. If the economy melts down and the financial world is ending, that HELOC could disappear.

            As usual, I love the discussion these posts engender, keep ’em coming!

  4. You are correct! Retiring early is NOT only for 2 types of people. Your approach is similar to mine and the philosophy I’ve documented in my book, Rich Little Piggy. It’s awesome to see yet ANOTHER person ready to retire early! You’ve proven (again) that it can be done. Keep up the great work.

  5. I’m not a big fan of this idea for a number of reasons:

    1) If you retire at 45, you may have another 45 years of more of expenses to fund. Unless you’re amply funded in all your accounts, you may run out of money, and you may not have the flexibility to cope with emergencies.

    2) For every additional year you work, you have that much more earned income to live on rather than drawing on your investments. Plus you can continue contributing to your retirement accounts and they keep on compounding. I retired just short of my 66th birthday and by the last two years I was earning 50% of my salary from investments alone. Of course it’s been a very good last few years for the market, but there’s no guarantee it will remain this strong indefinitely.

    3) I don’t know about your pension, but you mention social security. Yes, you can start collecting at 62, but for every year you wait until 70, you gain about 8% in benefits. There’s a lot of debate about the long-term viability of social security and I don’t want to go into that here. But benefits are calculated on your highest 35 years of earned income, and if you retire early, you potentially impact the amount you’ll receive. I am currently living off my retirement accounts and don’t plan to file for SS until 68 at the earliest, at which point SS may well cover most of my expenses. You also have to consider how SS is taxed, especially if combined with other income.

    4) You also need to have some idea what you’re going to do with the rest of your life if you retire early. Do you plan to do volunteer work, do you need interaction with co-workers or clients, do you plan to start your own business? If the latter, I’d question whether you are truly retired or just self-employed.

    • Come on Larry, for once be a glass half full kind of guy 🙂

      1) You can see in the spreadsheet the draw down rate is 4%. That means I should be able to live off the interest earned from the account without having to touch the principle.

      2) There is no denying for each additional year I work, my earning potential, and retirement portfolios will increase. But at what cost? More years working, which totally contradicts the idea of retiring early. My goal isn’t to have just a boat load of money to lavishly spend. I’d rather retire at 45 and live a comfortable middle-class life for 40 years. Then have to work until I’m 65, only to have way too much money, and not enough energy or things I want to spend it on.

      3) See point above. Same concept. I know I could delay SS and earn more, but again at what cost? Each year I get older, especially late in life, increases the chance of death, or serious health complications.

      4) What would I do if I retire early? Whatever the heck I want. That’s the beauty of it. I might go on Young Life staff (the ministry I volunteer for). I’d love that job, but the pay is only about $40,000 per year. Maybe Girl Ninja and I would travel for a year, and then work for a year. Maybe I’d sit at home and drink gratutious amounts of coffee.

      One thing is for sure though, I’ll only have the option to work or not work, if I start planning now for an early retirement. If at 45 I’m loving my job, I’ll keep working. But what if I’m 45 and miserable? Only way to have an out is by thinking ahead.

      • Agree 100% with you (especially #2 & #4)!! I’m 44 now, haven’t worked in over a year & have AMPLE things to do. Freedom is awesome! I do a lot to help others achieve financial freedom, to include veterans. (which is when I had time to write my book). You enjoy your life!

        • Brandon, this has nothing to do with glasses, full or otherwise. It has to do with trying to plan your financial life when you’re 29, when you should know by now that circumstances change all the time. Five years ago you didn’t have a wife, baby, dog, or house, but you did have student loan debt. Five years from now you could have four dogs, a cat, two chickens, and sextuplets for all I know.

          Of course “more years working totally contradicts the idea of retiring early.” And yes, “each year you get older, especially late in life, increases the chance of death, or serious health complications.” But that’s going to cost money you don’t seem to have planned for. Insurance, Medicare included, doesn’t pay for everything (once you’re on Medicare, assuming it survives in present form, you’ll have premiums and copays – I myself had over $8,000 in unreimbursed medical expenses last year, largely dental).

          Believe me, I’m all in favor of doing all you want, but that takes money too. Travel for a year for two persons? You’re talking $60K or more right there. And what do you do with the kid?

          If at 45 or so you can retire early, be my guest. But I don’t think you should make such a drastic step without consulting with a professional financial advisor, and not just from reading some uncredentialed blogger on the web.

          • For some reason you seem to be confusing this plan, for a decision I’m locking in today and stuck with.

            Sure I didn’t have a wife, a house, a baby, or a dog five years ago. But you know what I was doing five years ago? Planning on having a wife, a baby, a dog, and a house. That’s why I paid off debt so quickly. We we saved for a down payment. And why we made sure we were financially stable so Girll Ninja could be a stay at home mom. Without planning, none of this would have been able to happen.

            29 year old Ninja thinks retiring at 45 sounds pretty good and has a financially reasonable way of making that happen. If circumstances change, or life throws a curveball, then it’s no big deal.

            Remember I’m not deciding today that I’m going to retire when I’m 45. I’m deciding today that I’m going to pursue that option.

            • I of course recognize this is not a decision you’re locked into. I’m the one who pointed out how circumstances change. Nonetheless, against all the cheerleading, I feel a counterbalancing voice is needed. Everyone likes the idea of early retirement; however, when the reality is weighed, that may not be as manageable or even as desirable as in the abstract it may seem.

              • Gotcha. It just seemed as though you were arguing against the plan. I was thinking you would also tell someone not to bother saving up a down payment because they may decide they don’t want to buy a house.

                I’m all for points and counterpoints and if anything has proven true over the years it’s that my plans and priorities can ebb and flow.

      • Here’s my question on your plan….why bother with the 72t distributions if you have Roth IRAs (where contributions, but not earnings can be withdrawn without penalty) and taxable accounts? I mean, at least initially you should/could withdraw from those accounts first, and only THEN think about using the 72t distributions.

        Also, you never mention this, but how would your pension be impacted by retiring early?

        • I like the idea of a Roth being secondary for any one off expenses that might not be expected. I’d treat the 72t withdrawals like a paycheck and my Roth as an excessive savings account.

          My pension is structured in that I get 1.1% of highest earned salary for each year of service. At 45 years old I’ll have been with the fed for 23 years, but wouldn’t be able to pull my pension benefits until 57.

          • Well, given 16 more years of you and your wife maxing out Roths ($11k a year, $5,500 per person), you could withdraw a total of $176,000 from your Roths penalty free (i.e. your contributions). Given your $48k a year needs, that gets you nearly 3 and 2/3 years of expenses right there (ignoring Roth contributions you made prior to being 29, which would up that).

            And that’s all non-taxed withdrawls. Your dividends from your taxable accounts could keep your income below even income taxable rates. And given zero income, capital gains would be minimal.

            I mean, I get what you’re saying with the 72t, and that giving you flexibility in your other accounts. But if you were interested in retiring early, your goal should be to bridge years 45-57 (when your pension kicks in), and then 57-59.5 (when you could access 401ks/IRAs penalty free). If you could figure out how to do that without doing the 72t, it might be very advantageous….

            Anyways, you’re right, though…you got a plan that could set you up well for early retirement.

            • Great points for sure and definitely something to consider. But it’s a little disingenuous to say that we’d get to pull from our Roth tax free.

              Sure that’s true, but it also ignores the fact that we already paid tax on that money, since Roth contributions are made with after tax income.

              The Roth IRA has a lot of people mislead and is not as great as people tend to think it is.


              • The great, often overlooked, value of the Roth over the traditional IRA or other sources of retirement income is that Roth withdrawals do not figure in the computations used to tax social security benefits.

                • I should also that there are no required minimum distributions from a Roth, vs. RMDs starting at age 70 1/2 from a tax-deferred account – which may also have the deleterious effect of increasing taxes on social security distributions.

                  Contrary to Ninja, I would say the Roth has a number of significant advantages over the tax-deferred IRA. My own Roth is relatively small, and I would consider converting part of my traditional IRA to a Roth if I could keep the taxes on the conversion low enough without pushing me into a higher bracket.

                  • My plan come retirement is to actually use the money I saved for retirement. I guess I just don’t envision being 70 years old and thinking, “Nah, I’ll just continue to let that money grow even though I’m probably in my last decade of life”.

                    That said, you do raise many valid points, and they are things to consider. If you want to leave a crap load of money to your kids the Roth is for sure the best way to do that. And the ability to manipulate your tax rate is also nice.

                    • It’s not just “nice,” it can make a significant difference in your tax liability. Example (single person, one exemption, standard deduction over 65, so the first $11700 of income is excluded from tax):

                      a) Total income is $30K social security. No federal tax.

                      b) Income is $30K SS plus $30K withdrawal from a tax-deferred IRA, possibly because of an RMD. Tax is now due on 46% of the SS benefits. Total tax: $4369.

                      c) Income is $30K SS plus $50K withdrawal from a tax-deferred IRA. Tax is now due on 85% of the SS benefits. Total tax: $6806.

                      d) Income is $30K SS plus $50K withdrawal from a Roth. No federal tax at this point (taxes having paid already on the Roth, and the SS is excluded from tax).

                  • It’s all a bit convoluted. Haha.

                    I agree with you to a large degree that the tax implications and ability to mitigate that with a Roth are there. But the example you use above seems like the assumption is that I’ll be working until it comes time to collect social security. The reality is my Roth will be used up in one way or another.

                    Maybe it’s to mitigate income tax on 72t withdrawals and allow me to pull a smaller out of 401k, thus lowering my tax bracket.

                    Maybe it’s to act as a savings cushion in the event I need access to a larger amount of cash that my “substantially equal distributions” wouldn’t allow for.

                    Or maybe it’s waiting to use the Roth until Social Security or my pension kick in and mitigating my tax obligation later in life.

                    The good news is, I have no plans to cease contributing to my Roth, so when the time comes to have to make decisions such as these I should be well prepared for multiple avenues.

                    Did you read the link to the couple that paid no tax in 2013. They hate Roth IRAs just as much as I do and used a number of loopholes to avoid paying any tax. I guess this is the silver lining in the overly complex tax code.

                    • Yes, I read the “inspirational” blog post. Forgive me if I wasn’t inspired. If you can in fact live off long-term capital gains without exceeding the 15% bracket, and/or you can take advantage of tax harvesting for capital losses, then this strategy will work for you. I’m just a little skeptical of early retirement claims for people in their 30s and 40s who may find their situations very different in the years ahead (and who may find that once they leave the workforce, it’s harder to get back in if needed).

                      I of course have no problem with keeping taxes low and no problem even with early retirement if it’s planned well. I couldn’t do it, maybe you can. But I’m just saying anyone embarking on this plan should be certain to review the situation thoroughly before making some possibly damaging moves. (For instance, your friend J. Money refers to 4% as “the amount experts/bloggers often recommend as the ‘safe withdrawal’ amount for retirees. But this rate has often been challenged, for example by Wade Pfau — — and it’s uncertain to me if it can be applied to early retirement strategies.)

                      Nonetheless, I have been told by one of your respondents that he “likes that you tell people that don’t like your plan to relax.” Ah, so that must be it. I need to take a nap. That will solve everything.

  6. My glass is full of the kool-aid!! We’ve been scheming about early retirement for a year now. I think it’s the most ingenious plan ever. Mad FIentist has been our go-to source for learning the ins and outs of how to get to our money that is supposed to be locked away until we are 60. We want it a full 20 years before that!

    We may warn some money after that day, but it will be on our terms, no someone else’s. To me that’s the true definition of early retirement… The freedom to spend my day doing the activities I choose.

  7. I think you need to dive more into the early retirement thought process and figure out more of your why. I don’t think ER is for everyone but I’m curious to know why you would?

    • See my comment above to Larry. Early retirement doesn’t necessarily imply I would stay at home and do nothing all day. Although it could mean that 🙂

      • It was a casual mention, got it. If you get serious the why makes all the difference. Good luck either way.

  8. Question about 72T. You mentioned that you could withdraw early if you took equal distribution until 59.5 years old or 5 years.

    So if 5 years comes sooner than 59.5 doesn’t matter. Or its until your 59.5 for a minimum of 5 years. Meaning if you are 35 and started taking distributions, that you would still need to continue distributions until 59.5 or pay the 10% penalty on all the distributions.


    • It’s the longer of the two time frames. So basically if you are less than 54.5 years old you have to withdraw until you turn 59.5.

      So a 35 year old would have to take those equal annual distributions for 24.5 years.

  9. Hey Mr Ninja man

    I like your plan, and I like that you tell people that don’t like your plan to relax

    Early retirement is frickin awesome, and don’t let anybody tell you any different. It looks like you have it all figured out (congrats on figuring out the Roth IRA isn’t all that)

    Thanks for sharing our posts on Never Paying Taxes Again. I fully plan on having $3+ million in tax-free income over the next 30 years, completely neutralizing the RMD, and paying $0 tax on SS. The earlier you retire, the more you win


  10. It’s always interesting to see someone’s journey! You and Girl Ninja are doing fantastic. We have a similar plan. Actually the goal is 40 years for FI. Doesn’t mean we’ll stop working, but want to have the freedom to do so.

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