withdrawl from 401k before 59 1/2?

[ljwobker]

I'm having trouble finding anything on the interwebz that covers this... but is there a general consensus as to whether starting withdrawls (via the SEPP method) from a 401k is a reasonable part of an early retirement?

It's pretty clear to me that after 59.5 (assuming the funds are built up) you get preferential tax treatments for withdrawls, etc and that makes a whole lot of sense. What is not entirely clear to me is what makes the most sense to provide for the window between "early retirement age" (whether that's 35 or 58 years is irrelevant except for the amount of money involved!) and 59.5 when all the "standard" rules/advice starts to apply.

Happy to read existing posts or docs or anything else, but finding strategies/options/tradeoffs to handle the part before 59.5 is proving harder than I expected...

[MN Finance]

What are the other options? If you have nonqualified money, then taking distributions from that makes more sense (possibly followed by some Roth conversions so you take advantage of no/low income rates). If you don't have nonqualified money, then you don't appear to have a choice in the matter. If you successfully use a 72t distribution strategy, there's no tax advantage/disadvantage to taking the money if that's your only source of income in early retirement. It just means you can take withdrawals "like" you're 59.5.

[livesoft]

401(k) withdrawals penalty-free when separated from service (i.e. no longer working at that employer) are allowed in the year you turn 55, so as early as age 54. Note the fine print.

Is it a reasonable part of early retirement? Who knows? It will all depend on lots of factors. Check out http://www.i-orp.com and http://www.firecalc.com and TurboTax for some calculators.

See also: http://retireearlyhomepage.com/wdraw59.html

[Alan S.]

Setting up a SEPP would be your last choice if you can comfortably avoid it because these plans are rigid and if you don't meet all the requirements, you will be hit with retroactive penalties and interest on those penalties. But if you happen to have all your assets tied up in retirement plan, a SEPP can be the only way out. If you qualify for the separation from service at 55 exception, the next step is to confirm that you can take flexible distributions from that plan as you need them and avoid a SEPP. However, if the plan provisions require a lump sum distribution or other inflexible withdrawal option, then you would not establish a SEPP plan from the 401k, you would roll it over to an IRA and establish the plan from your IRA account. You have much better control of an IRA account than a 401k plan, which can change providers in the middle of your plan. For examples of IRA flexibility, if your distribution was too large for some reason, with an IRA you could roll the excess back within 60 days, but would not be able to from a 401k plan.

Due to the record low interest rates, a SEPP plan will only generate little more than 4% of the account balance in annual distributions. This may not be enough, and if so it increases the chance you will bust the plan. Conversely, if your account balance will generate more than you need, you should partition your IRA into one for the SEPP with the appropriate account balance and another for emergency needs that you get penalized funds from but such access would save your SEPP plan from failure due to taking out an emergency distribution.