Early Retirement

Although 59 1/2 is the magic number for starting to receive retirement plan distributions without penalty (whether you continue to work or not), you can get full access to your money in a company plan such as a 401(k) if you retire as early as 55. The hitch is, you have to stop working entirely. If you plan to retire younger than that, you'll pay a penalty for spending the money early unless you follow a very specific set of rules for withdrawing it. Some company plans allow this, others don't. If yours doesn't, you'll have to roll your money into an IRA first and then initiate the withdrawals.

The Roth IRA allows tax-free and penalty-free withdrawals of your contributions before you hit 59 1/2, however, you have to wait five years to withdraw conversion contributions from traditional IRAs. Tax-free penalty-free withdrawals of Roth IRA earnings are allowed after age 59 1/2.

Here's the strategy to use for preage-59 1/2 withdrawals from traditional IRAs if you want to avoid the 10% premature withdrawal penalty. Here's how it works: Take the cash in installments based on your life expectancy. Each year, you can withdraw a fraction of your balance derived from the number of years you are expected to live.

In other words, if actuarial tables predict you have another 30 years to go, you can withdraw 1/30th of the balance of your account for that year. As long as you make these annuity-like withdrawals each year (no more, no less), you don't have to pay a 10% premature withdrawal penalty (although you do have to pay income taxes). You'll need to continue with the schedule only until you reach 59 1/2 or for at least five years, whichever is longer. After that, you can modify the schedule, or take a lump payment with no penalty.

We don't recommend you do this unless you really need the income. The 10% penalty for early withdrawals will also be waived if you need the money because of death, disability or to pay medical expenses in excess of 7.5% of your adjusted gross income. If you do take early withdrawals, consult a tax expert who has some experience in planning IRA distributions.