How do you retire early if your money is tied up in tax deferred?

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justsomeguy2018
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How do you retire early if your money is tied up in tax deferred?

Post by justsomeguy2018 » Sun May 24, 2020 11:51 pm

If you are 53 and have a $2.5M portfolio, how do you retire early if most of it is in a 401k? Arent there penaities if u withdraw before 59.5?


curryitr
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Re: How do you retire early if your money is tied up in tax deferred?

Post by curryitr » Sun May 24, 2020 11:56 pm

Check out the rule of 55. If you wait till the year you turn 55 to quit you should be able to access it without penalty. Otherwise people usually plan to have some in a taxable account, or pull out Roth contributions from their Ira which are penalty free.

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justsomeguy2018
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Re: How do you retire early if your money is tied up in tax deferred?

Post by justsomeguy2018 » Mon May 25, 2020 12:14 am

SnowBog wrote:
Sun May 24, 2020 11:55 pm
Check out: https://www.bogleheads.org/wiki/Substan ... c_payments
Interesrjng....so what if you have it mostly in t401k and not tIRA?

CFM300
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Re: How do you retire early if your money is tied up in tax deferred?

Post by CFM300 » Mon May 25, 2020 12:54 am

justsomeguy2018 wrote:
Mon May 25, 2020 12:14 am
what if you have it mostly in t401k and not tIRA?
Roll the 401k into an IRA?

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Eagle33
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Re: How do you retire early if your money is tied up in tax deferred?

Post by Eagle33 » Mon May 25, 2020 3:14 am

curryitr wrote:
Sun May 24, 2020 11:56 pm
Check out the rule of 55. If you wait till the year you turn 55 to quit you should be able to access it without penalty. Otherwise people usually plan to have some in a taxable account, or pull out Roth contributions from their Ira which are penalty free.
+1 Keep working for another 2 years unless work is hell.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

marcopolo
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Re: How do you retire early if your money is tied up in tax deferred?

Post by marcopolo » Mon May 25, 2020 3:46 am

justsomeguy2018 wrote:
Sun May 24, 2020 11:51 pm
If you are 53 and have a $2.5M portfolio, how do you retire early if most of it is in a 401k? Arent there penaities if u withdraw before 59.5?
when you say most, what percentage so you mean?

Rule 72t cam be implemented right away, but it is very restrictive.
A better option, if you have some additional funds to float you for a while, is to implement a Roth conversion ladder.
Once in a while you get shown the light, in the strangest of places if you look at it right.

sailaway
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Re: How do you retire early if your money is tied up in tax deferred?

Post by sailaway » Mon May 25, 2020 3:58 am

If you are planning on early retirement, you balance Roth, traditional and taxable accounts as you work towards it. For a six year gap, that can still leave the vast majority in a traditional 401k.

If you suddenly realize that you are rich enough to do this or suddenly have the rug pulled out from under you, you take stock and consider the many possibilities listed here (rule of 55, 72t). It is possible for traditional to have been the best thing even if you have to pay the 10% penalty (ie, it went in at 28% and comes out at 12%).

Nate7out
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Re: How do you retire early if your money is tied up in tax deferred?

Post by Nate7out » Mon May 25, 2020 5:47 am

How to Access Retirement Funds Early

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quisp65
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Re: How do you retire early if your money is tied up in tax deferred?

Post by quisp65 » Mon May 25, 2020 7:12 am

SEPPs can be expensive if you mess up and not all work retirement plans offer partial withdrawals.
My work stated they allowed partial withdrawals at 55 from my 403b (not all work plans do), but when retirement came, they denied me the money, and then they changed their mind just as I gave up and rolled the money over to an IRA, despite me pleading with them for a long time with various supervisors. Keep in mind that work retirement funds are great in taking your money but aren't so good at giving it back.

Whatever you do... the govt has made it hard to retire earlier than 59.5 and that is by design.
Last edited by quisp65 on Mon May 25, 2020 6:39 pm, edited 3 times in total.
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

UpperNwGuy
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Re: How do you retire early if your money is tied up in tax deferred?

Post by UpperNwGuy » Mon May 25, 2020 7:18 am

If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.

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justsomeguy2018
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Re: How do you retire early if your money is tied up in tax deferred?

Post by justsomeguy2018 » Mon May 25, 2020 8:34 am

UpperNwGuy wrote:
Mon May 25, 2020 7:18 am
If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.
I am only 39 actually. My example was a hypothetical.

How do I set up the investments in my late 40s?

New Providence
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Re: How do you retire early if your money is tied up in tax deferred?

Post by New Providence » Mon May 25, 2020 8:51 am

justsomeguy2018 wrote:
Mon May 25, 2020 8:34 am
UpperNwGuy wrote:
Mon May 25, 2020 7:18 am
If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.
I am only 39 actually. My example was a hypothetical.

haha.....that was pretty funny :D

In my case I have deferral income set up to be received during my late 50's to cover gap before accessing 401k

retired@50
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Re: How do you retire early if your money is tied up in tax deferred?

Post by retired@50 » Mon May 25, 2020 8:53 am

justsomeguy2018 wrote:
Mon May 25, 2020 8:34 am
UpperNwGuy wrote:
Mon May 25, 2020 7:18 am
If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.
I am only 39 actually. My example was a hypothetical.

How do I set up the investments in my late 40s?
I'd start now.

The general method for people who plan to retire early is to use a taxable account. For taxable accounts, there aren't any withdrawal rules. The only downside to taxable accounts is the annual taxes paid on dividends or capital gains. However, they (taxable accounts) provide flexibility and freedom from work if you seek it.

Regards,
This is one person's opinion. Nothing more.

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Brianmcg321
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Re: How do you retire early if your money is tied up in tax deferred?

Post by Brianmcg321 » Mon May 25, 2020 8:55 am

justsomeguy2018 wrote:
Mon May 25, 2020 8:34 am
UpperNwGuy wrote:
Mon May 25, 2020 7:18 am
If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.
I am only 39 actually. My example was a hypothetical.

How do I set up the investments in my late 40s?
Start investing in a taxable account and a Roth.

In a taxable account you can use the money whenever.
In a Roth IRA you can take out your contributions penalty free.

You don’t need millions in these accounts. Just enough to get you to 59.5. So if you were 53, you’d need 7 years worth of expenses.
Last edited by Brianmcg321 on Mon May 25, 2020 8:57 am, edited 1 time in total.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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TheTimeLord
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Re: How do you retire early if your money is tied up in tax deferred?

Post by TheTimeLord » Mon May 25, 2020 8:56 am

justsomeguy2018 wrote:
Mon May 25, 2020 12:14 am
SnowBog wrote:
Sun May 24, 2020 11:55 pm
Check out: https://www.bogleheads.org/wiki/Substan ... c_payments
Interesrjng....so what if you have it mostly in t401k and not tIRA?
Roll it to a tIRA when you retire.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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TheTimeLord
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Re: How do you retire early if your money is tied up in tax deferred?

Post by TheTimeLord » Mon May 25, 2020 8:58 am

justsomeguy2018 wrote:
Mon May 25, 2020 8:34 am
UpperNwGuy wrote:
Mon May 25, 2020 7:18 am
If a person wants to retire at age 53, they need to start setting up their investments in their late 40s to facilitate that goal. Sounds like you didn't do that. My advice is not to retire for a few more years.
I am only 39 actually. My example was a hypothetical.

How do I set up the investments in my late 40s?
So you have 8-10 years and you are having trouble figuring out how to put money into a taxable account?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

rkhusky
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Re: How do you retire early if your money is tied up in tax deferred?

Post by rkhusky » Mon May 25, 2020 10:01 am

CFM300 wrote:
Mon May 25, 2020 12:54 am
justsomeguy2018 wrote:
Mon May 25, 2020 12:14 am
what if you have it mostly in t401k and not tIRA?
Roll the 401k into an IRA?
Or roll only some of it into a tIRA, if there is some reason why you prefer the 401K to an IRA. You even may want to have multiple tIRA’s, because you may not want to lock up all your tax-deferred money in a SEPP.

Rule of 55 is very useful for early retirement, if you can wait that long. So is withdrawing Roth contributions.

curryitr
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Re: How do you retire early if your money is tied up in tax deferred?

Post by curryitr » Tue May 26, 2020 7:10 am

Since you have so long to plan my recommendation would be this: Accumulate enough in a Taxable account and/or in Roth IRA (contributions) to last 5 years. Then the year you retire start doing annual Roth conversions from your 401k to make a ladder. After the 5th year when your taxable and other savings run out you will then be able to access the principle of the first conversion you did 5 years prior.

There are tons of articles available about Roth Ladders and the rule of 55. If you have enough saved in the right accounts it’s not that difficult to retire prior to 59.5.

scrabbler1
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Re: How do you retire early if your money is tied up in tax deferred?

Post by scrabbler1 » Tue May 26, 2020 7:23 am

If you have company stock in your 401k, you can cash it out using NUA to lessen the tax bite. That's what I did. Most of the company stock's value was NUA, so the max tax rate on it was only 15% (the top cap gains rate back in 2008; today, it's a little higher). The cost basis of the stock was very small, so the 10% tax penalty on it was under $1,000.

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JoMoney
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Re: How do you retire early if your money is tied up in tax deferred?

Post by JoMoney » Tue May 26, 2020 7:31 am

Along with the other methods mentioned, if the money is in a 401k specifically, if you reach age 55 and retire you can usually withdraw early (the age 55 rule is unique specifically to 401ks).

Although other methods to avoid the penalty are preferable, you could simply just withdraw the money knowing you'll have an additional 10% penalty for withdrawing early. That wouldn't be the preferred method since there are ways to avoid the penalty if you're going to be withdrawing a stream of income over time, but people (unfortunately) still do it all the time. You're not disallowed to withdraw the money, there's just an additional penalty (along with the taxes owed) .
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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teen persuasion
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Re: How do you retire early if your money is tied up in tax deferred?

Post by teen persuasion » Tue May 26, 2020 8:07 am

curryitr wrote:
Tue May 26, 2020 7:10 am
Since you have so long to plan my recommendation would be this: Accumulate enough in a Taxable account and/or in Roth IRA (contributions) to last 5 years. Then the year you retire start doing annual Roth conversions from your 401k to make a ladder. After the 5th year when your taxable and other savings run out you will then be able to access the principle of the first conversion you did 5 years prior.

There are tons of articles available about Roth Ladders and the rule of 55. If you have enough saved in the right accounts it’s not that difficult to retire prior to 59.5.
The Roth ladder is our plan to access the 401k (rolled to tIRA) before 59.5.

You really only need to cover a 4 year gap, if you time it right. If you convert late December 2020, that conversion is available for penalty free withdrawal Jan 1 2025.

We've currently hit 5* baseline expenses in Roth IRA contributions (total of both our accounts); we opened Roth IRAs only 10 years ago, after paying down our mortgage 15 years early. In hindsight, we should have started Roth IRAs earlier than 43, but we are still doing well. We've also been contributing to an HSA, and paying medical expenses OOP, so we can tap the unreimbursed expenses during the gap years, if needed.

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JoMoney
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Re: How do you retire early if your money is tied up in tax deferred?

Post by JoMoney » Tue May 26, 2020 8:23 am

^ FWIW, if allowed in your 401k plan, making after-tax (non roth) contributions that can be rolled over to a roth IRA i.e. "Mega backdoor roth", can be a way to beef up roth funds available for withdrawal to kick-start an early withdrawal ladder.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

supersecretname
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Re: How do you retire early if your money is tied up in tax deferred?

Post by supersecretname » Tue May 26, 2020 8:55 am

Nate7out wrote:
Mon May 25, 2020 5:47 am
How to Access Retirement Funds Early
this is the answer. roth conversion ladder.

Rudedog
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Re: How do you retire early if your money is tied up in tax deferred?

Post by Rudedog » Tue May 26, 2020 9:13 am

You plan ahead. You have money in taxable accounts and you have other income streams such as sale of a business, rental property or a part-time job. Let the money in tax-deferred grow until you are required to take RMDs. Pay off all debt. Have a spouse that likes her job and continues to work. :D

milktoast
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Re: How do you retire early if your money is tied up in tax deferred?

Post by milktoast » Tue May 26, 2020 10:55 am

justsomeguy2018 wrote:
Sun May 24, 2020 11:51 pm
If you are 53 and have a $2.5M portfolio, how do you retire early if most of it is in a 401k? Arent there penaities if u withdraw before 59.5?
Different question. If you are 53, how did you get $2.5M into that 401k? I've been contributing the max for a long time and haven't gotten there yet.

To answer your question (given you have time), I suggest maxing t401k then maxing your 401k after-tax (mega backdoor Roth). Then instead of rolling it over to Roth 401k, roll it into Roth IRA. Your contributions (but not earnings) can be withdrawn penalty free five years later.

And once you have maxed the mega backdoor, toss the rest into taxable.

Between the two, hopefully you can make it to 59.5.

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