How To Access Military Retirement Funds Early

Updated: December 24, 2022
In this Article

    Please note that this article is not to be considered financial advice. Consult a financial professional before making decisions about accessing military retirement funds.

    What follows is a description of a program that permits Veterans to access military retirement funds early, and should not be confused with encouragement to do so. That is a decision only the consumer can make based on a careful review of circumstances, current financial need, and future financial planning.

    All early-access programs for retirement money carry with them large potential for tax liabilities, indebtedness, loss of principal, or other issues. Always consult a financial expert or tax professional to understand the implications (tax and otherwise) of accessing retirement funds ahead of schedule.

    Retirement Accounts, Not Military Retirement Pay

    There is a specific type of early withdrawal program for taking money out of an Individual Retirement Account (IRA) or another qualified retirement plan that meets IRS requirements. We will use “IRA” as shorthand for all qualifying retirement accounts. If you aren’t sure whether your retirement account is a qualified account, ask.

    This is not a guide to accessing military retirement pay early, which is not possible. You are only eligible to draw military retirement pay after serving a minimum of 20 years in uniform (unless otherwise authorized by the DoD to participate in an early retirement program that may or may not be offered in any given year) and have officially “dropped papers” for military retirement.

    Withdrawing IRA Funds Early

    IRAs don’t permit account holders to withdraw money penalty-free until age 59 and a 1/2. Those who do withdraw before then are subject to a 10% tax known as the early distribution penalty tax. The early withdrawal process involves something called 72(t) payments, named after IRS Code Section 72(t) which governs them.

    How can you avoid the 10% tax? Choosing a distribution method known as Substantially Equal Periodic Payment (SEPP) avoids IRS penalties by following a specific plan to access the funds. How does it work?

    • SEPP allows retirement funds to be distributed on an annual basis over five years or until the payee reaches age 59 and 1/2.
    • These withdrawals are subject to income tax.
    • Completing the SEPP plan is required to avoid all penalties you were seeking to avoid plus interest.
    • You are required to choose between three different distribution types under SEPP. Each one has a different payout calculation. You can choose between amortization, required minimum distribution, and annuitization.
    • You may only change your distribution preferences ONCE.

    A withdrawal penalty, where applicable, may be charged in different ways. For example, those who cash out Certificates of Deposit should not expect the penalties to be the same for all financial investments.

    They vary depending on the type of investment, how early the withdrawal was (in some case), and may be charged in the form of paying a forfeit in terms of accrued interest or you may be required to pay a specific dollar amount. It is crucial to read ALL the fine print when agreeing to SEPP or any other early withdrawal.

    The SEPP Distribution Options

    As mentioned above, SEPP can be divided into three different options:

    • Required Minimum Distribution
    • Amortization
    • Annuitization

    Required Minimum Distribution involves using a calculation based on your age and the account balance at the end of the prior year. The math you do with this option requires you to recalculate the early withdrawal amount every year based on the new prior year-end balance and current age. Consumers who opt-in to this are basically making calculations based on the balance of the account versus life expectancy.

    The Amortization option for calculating the payment includes a life expectancy of the consumer calculation and an interest rate. The payout for each year is identical.

    Annuitization is similar, calculated based on the taxpayer’s age, an interest rate, and with information supplied by a mortality table created by the Internal Revenue Service.

    What You Need To Know About SEPP

    While you may use any qualified retirement account for SEPP withdrawals, you cannot use the current 401(k) you are paying into with your current employer. That is a very important detail to remember. SEPP can be set up via your lender, or a financial advisor.

    The “current employer rule” is critical to some in uniform as they may wish to access IRA funds early, but have not yet left military service.

    Withdrawing 401(k) or IRA funds while still serving is not always the first course of action you should consider; advance pay, a personal loan, or emergency relief from one of the military aid societies such as Navy-Marine Corps Relief Society or the Air Force Aid Society may be better options depending on circumstances and need.

    SEPP is not designed to be flexible. The younger you are when you apply, the greater your potential for dissatisfaction with it, especially if you are keeping an eye on what your early-withdrawn funds COULD be doing if they were left alone to accrue.

    Some IRA early withdrawal options outside of SEPP are more appropriate for some; if you need money to pay medical expenses, or if you have made a first-time home purchase you may qualify for exemptions from the IRA early withdrawal penalty without having to resort to a SEPP plan.


    Consumer Beware

    Accessing retirement funds early in the ways listed above can be tricky. Unfortunately, the advice of an investment professional or tax professional is important for retirement fund issues. Much of the guidance provided by the IRS does not address specific issues common to consumers that may be handled on a case-by-case basis.

    What’s more, it is VERY easy to make mistakes with SEPP and 72(t) withdrawals that can cost you in tax penalties.

    It is best to discuss your needs with a financial planner or tax expert who may be able to steer you to less risky options should you need funds for medical expenses, buying a home, or other needs that may qualify for other tax-exemptions, tax breaks, or special programs designed to help you access retirement funds early.

    Written by Team