MOST PEOPLE THINK EARLY retirement is a glorious thing. Unfortunately, Uncle Sam doesn't agree.

Fact is, should you retire before age 59 1/2 -- what the U.S. tax code generally deems to be retirement age -- you could face ugly tax hits when tapping tax-favored retirement accounts. Generally speaking, you'll face an income tax hit (federal and maybe state, too) plus a 10% premature-withdrawal penalty.

Sadly, it's not always possible to get around the federal income tax hit. But it is often possible to avoid that 10% penalty -- provided you plan ahead. Here are three ways to do it.

Option 1: Take Roth IRA Withdrawals

With a Roth IRA, you can withdraw your contributions (not earnings) federal-income-tax-free and often penalty-free before age 59 1/2. This can get a little tricky, however, since your Roth account can potentially include money from three different sources:

1. Money from your annual after-tax contributions.
2. Money from converting any traditional IRAs into Roth IRA status ("conversion contributions").
3. Earnings on your contributions.

When you take Roth IRA withdrawals, they are considered to come from these three sources in the order listed above. Favorable tax rules apply to withdrawals from the first two sources (annual contributions and conversion contributions). So here's how that works:

* You can take withdrawals from the first source (annual contributions) income-tax-free and penalty-free at any time. This represents a tax-smart source of cash.

* You can also take withdrawals from the second source (conversion contributions, if you made any) income-tax-free at any time. However, you'll generally owe the 10% premature-withdrawal penalty tax when a conversion contribution is withdrawn within five years of the beginning of the year in which it was made. So this represents a good source of cash when these funds have had at least five years to percolate.

* Withdrawals before age 59 1/2 from the third source (Roth account earnings) will usually be subject to income tax. The exceptions are when: (1) the account has been open more than five years (the five-year period is deemed to start on January 1st of the year in which you made your initial contribution to any Roth account) and (2) you are disabled or dead (I hope not) or you withdraw up to $10,000 for a qualified home purchase. A qualified home purchase is when you buy a principal residence after not having owned one for at least two years. A qualified home purchase also includes a purchase by your child or grandchild, provided that person meets the two-year rule. Beware: The $10,000 limit is a cumulative lifetime maximum.

Bottom Line: Withdrawals of Roth IRA earnings that don't fit the preceding descriptions get hit with federal income tax and maybe state income tax, too. Before age 59 1/2, you will also get socked with the 10% premature-withdrawal penalty tax, unless you qualify for an IRA penalty exception (see next page).

Option 2: Take Advantage of Penalty-Free Exceptions

If you don't have a Roth IRA, then an income-tax-free withdrawal might not be an option for you. So you must now accept the fact that you'll owe income taxes on any additional retirement account withdrawals. Such is life.

The objective now is to avoid the dreaded 10% penalty tax that generally applies to retirement account withdrawals before age 59 1/2. Fortunately, there are a number of exceptions that allow penalty-free withdrawals. I've broken them out based on IRA exemptions and qualified retirement-plan exemptions (401(k)s and the like).

Penalty-Free Exemptions for traditional IRAs, SEP accounts, SIMPLE-IRAs, and Roth IRAs:

* Withdrawals after you've annuitized the account. (See Option 3 below.)

* Withdrawals to make a qualified home purchase ($10,000 lifetime limit). A qualified home purchase is when you buy a principal residence after not having owned one for at least two years. A qualified home purchase also includes a purchase by your child or grandchild, provided that person meets the two-year rule. The $10,000 limit is a cumulative lifetime maximum.

* Withdrawals to pay qualified college expenses for you, your spouse, your child or your grandchild.

* Withdrawals to pay medical expenses in excess of 7.5% of your adjusted gross income (this is the amount you can write off as an itemized deduction on Schedule A of Form 1040). For most taxpayers, that threshold will rise to 10% in 2013. For those 65 or older, it won't rise to 10% until 2016.

* Withdrawals to pay health-insurance premiums during certain periods of unemployment.

* Withdrawals after your death or disability.

Penalty-Free Exemptions for qualified retirement plans (employer-sponsored 401(k)s, and for the self-employed: Keogh plans, solo 401(k) plans, and employer-sponsored pension and profit-sharing plans).

* Withdrawals after separating from service (quitting, retiring, getting fired or otherwise leaving employment) at age 55 or older.

* Withdrawals after you've annuitized the account. (See Option 3 below.)

* Withdrawals to pay medical expenses in excess of 7.5% of your adjusted gross income (this is the amount you can write off as an itemized deduction on Schedule A of Form 1040). For most taxpayers, that threshold will rise to 10% in 2013. For those 65 or older, it won't rise to 10% until 2016.

* Withdrawals paid to a spouse, ex-spouse, or dependent under a divorce-related qualified domestic relations order.

* Withdrawals after your death or disability.

Option 3: Annuitize Your Account for Surefire Penalty-Free Withdrawals

This is generally the surest way to make yourself eligible for penalty-free retirement account withdrawals before age 59 1/2. All you do is follow three basic rules.

1. You must take a series of withdrawals (at least annually) with the amounts based on your life expectancy. I call this annuitizing your account, because it's similar to what would happen if you turned your account into a lifetime annuity.

2. For a qualified retirement plan account (self-employed Keogh plan, solo 401(k) plan, or employer-sponsored pension or profit-sharing plan), you must be separated from service. That means you must have quit, retired, gotten laid off or fired, or otherwise left your job. In the case of a self-employed Keogh plan or solo 401(k) plan, you presumably must have retired from the self-employment activity for which your plan was set up. With a traditional or Roth IRA, SEP account or SIMPLE-IRA, you can put the annuitization strategy to work at any time.

3. Once you start taking these annuity-like withdrawals, you must stick with the program for at least five years or until you reach age 59 1/2, whichever comes later.

If you have several IRAs or qualified retirement plan accounts, you need not annuitize them all. Instead, you can simply annuitize one or more accounts to generate annual annuity-like withdrawals sufficient to cover your cash needs. You can leave all your other retirement accounts untouched and thus preserve their tax advantages to the max.