There's good news for anyone who wants to retire early and withdraw IRA funds penalty-free before age 59 ½. The method is called substantially equal periodic payments or SEPP. According to IRS rule 72(t) — that's the rule that establishes the 10 percent early withdrawal penalty — you can avoid the 10 percent hit if you withdraw a portion of your money from your IRA in a series of carefully calculated annual payments. The SEPP method is good for both traditional and Roth IRAs [source: IRS].
The IRS offers three acceptable methods for calculating your SEPP. Each method is based on your current age, your life expectancy and something called the Applicable Federal Mid-term Rate, a baseline interest rate established by the IRS for tax purposes. You can find a detailed explanation of each calculation method on the IRS Web site. In short, these calculation methods tell you exactly how much money you can withdraw from your IRA each year without incurring a penalty.
The trick with the SEPP method is that you must withdraw the predetermined amount exactly — not a penny more or less — and you must make annual withdrawals for at least five years or until you turn 59 ½, whichever comes last [source: IRS]. Any deviation from this method will trigger a retroactive 10 percent penalty on all the money you have withdrawn [source: Money Magazine]. The upside is that you can launch your retirement at 50 (or younger) and access some of that IRA cash early.