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Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Tue Dec 15, 2015 12:17 pm
by macheta
Hi - I was interested in retiring at 55. Where should I place the funds which will be needed between 55 and 59.5? It looks like roth and 401k are subject to penalty if taken out before 59.5.

Thanks!

Re: Retire at 55

Posted: Tue Dec 15, 2015 12:22 pm
by Leeraar
There are exceptions to the 59.5 early withdrawal rule.

L.

Re: Retire at 55

Posted: Tue Dec 15, 2015 12:27 pm
by keystone
I plan to retire at 49 and will use my taxable account to fund my expenses from 49 to 59.5.

Besides that, one can withdraw Roth IRA contributions free of penalty or they could withdraw per IRS 72(t).

Re: Retire at 55

Posted: Tue Dec 15, 2015 12:33 pm
by macheta
Thanks... You guys answered my question!

Applies towards 401k only:
Separation from Service
the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)**

Re: Retire at 55

Posted: Tue Dec 15, 2015 12:35 pm
by macheta
Keystone - How would you withdrawal a Roth IRA contribution free of penalty prior to 59.5?
keystone wrote:I plan to retire at 49 and will use my taxable account to fund my expenses from 49 to 59.5.

Besides that, one can withdraw Roth IRA contributions free of penalty or they could withdraw per IRS 72(t).

Re: Retire at 55

Posted: Tue Dec 15, 2015 12:44 pm
by mhc
macheta wrote:Keystone - How would you withdrawal a Roth IRA contribution free of penalty prior to 59.5?
keystone wrote:I plan to retire at 49 and will use my taxable account to fund my expenses from 49 to 59.5.

Besides that, one can withdraw Roth IRA contributions free of penalty or they could withdraw per IRS 72(t).
You have to make a distinction between contribution and earnings.

Re: Retire at 55

Posted: Tue Dec 15, 2015 1:19 pm
by garlandwhizzer
I retired at 50 and have a few suggestions about how to manage this situation.

First have a considerable sized personal non-tax deferred account made up of two components, tax efficient equity and cash. As for equity, TSM is incredibly tax efficient and throws off higher dividends than most high quality bond funds. It is a no-brainer for your equity position. Take equity distributions in cash and make up whatever extra money you need from selling equity and generating only long term capital gains. If your current equity position in personal account has multiple individual stocks or equity funds, sell them as needed in a tax efficient manner aiming to produce total income just below the next federal tax bracket cutoff. Move these assets in a tax efficient manner every year by selling these positions for cash to spend and any extra to the simplicity, maximal diversification, minimum cost, and maximal tax efficiency of unbeatable TSM. Tax loss harvest when possible in selling equities.

The second key ingredient to this personal account is either a money market fund or a very short term, very high quality bond fund, a safe place from which you can draw funds without any tax consequences as money is needed. Keep a minimum of 2 years of anticipated expenses in this account at all times, more if it helps you sleep at night. Use this account during market downturns to provide living expenses so you can avoid or minimize the sale of equities into market weakness. Sell equities from positions of relative market strength to periodically replenish this safe account.

If possible, provide living expenses from this personal account alone until required minimum distributions are come in at age 70.5. Thereafter make up whatever shortfall you have between required minimum distributions with this personal fund. If you start using your tax deferred account at 59.5 for expenses you'll be paying significantly more in taxes than by selling non-tax deferred personal investments that produce long term capital gains.

Another very key point, reduce living expenses and don't wait until you're retired to do it. Do not carry a high mortgage which has to be fed every month with lots of dollars. If possible own your own home outright so no monthly mortgage payment is needed. By lowering your income needs, your SS taxability and the ability to deduct medical expenses, charitable gifts, etc., from income tax is increased because the deductibility of these are tied to their percentage of total unadjusted income. Do not get in a position where you have to generate a huge amount of income monthly for living expenses which can get ugly for your portfolio in bear market downturns.

Most of the above, like having a considerable sized personal non-tax deferred account in addition to tax deferred accounts, cannot be done instantly when you retire. It has to planned for and achieved starting well before you quit your day job.

Finally if you're young and have a long time horizon until retirement, put at least some of your IRA contributions into Roth IRA, giving your tax-free money lots of time to grow. Maximize IRA and other tax deferred contributions. It is likely that due to the current gulf between US govt. obligations and tax revenues, eventually income taxes are likely to rise at some point in the future. Having the ability to tap into money without paying taxes to get at it is quite nice now and will likely be nicer in the future.

Garland Whizzer

Re: Retire at 55

Posted: Tue Dec 15, 2015 2:53 pm
by macheta
Garland - nice post. thank you!

Re: Retire at 55

Posted: Tue Dec 15, 2015 3:09 pm
by keystone
macheta wrote:Keystone - How would you withdrawal a Roth IRA contribution free of penalty prior to 59.5?
As another poster pointed out, you have to keep track of your contributions vs. earnings (not much of a problem if you complete IRS form 8606 annually) and contributions from Roth IRAs can be withdrawn free and clear of any penalties or restrictions prior to age 59.5. This link covers it quite well:

http://www.schwab.com/public/schwab/inv ... awal_rules

Re: Retire at 55

Posted: Tue Dec 15, 2015 3:16 pm
by Reb Tevye
macheta wrote:Garland - nice post. thank you!
Ditto. Thanks.
Your thorough post greatly helps me with my planning and thinking.

Re: Retire at 55

Posted: Tue Dec 15, 2015 4:41 pm
by UncleMax
Garland,

Thank you for your detailed post. I too am retiring at 50 at the end of this year (15 days from today)!

Your post is very much in line with my plans, I appreciate the validation.

Regards,
UM

Re: Retire at 55

Posted: Tue Dec 15, 2015 4:55 pm
by LadyGeek
UncleMax, Welcome!

I just wanted to point out that VictoriaF's Roll Call for the Retirement Class of 2015! might be of interest.

Re: Retire at 55

Posted: Tue Dec 15, 2015 5:16 pm
by UncleMax
LadyGeek wrote:UncleMax, Welcome!

I just wanted to point out that VictoriaF's Roll Call for the Retirement Class of 2015! might be of interest.
Thanks for the link. I just posted my retirement Roll Call over there.

(Sorry to temporarily hijack the thread)

UncleMax

Re: Retire at 55

Posted: Tue Dec 15, 2015 5:23 pm
by SeeMoe
First, Do Not touch your DCP's until RMD time arrives ! Our pensions allowed us to retire in our early 50's with money left over to continue funding our taxable Vanguard folio . Kept it, and 2 IRA's, at about 60/40 until recently when RMD's started . Now it is about 45/55 . Still do not need Buck$ from these accounts except for big ticket items like a 5 star CCRC a while back, a new Acura MDX Advance every 3 years,...So far so good to, and retired 20 years now . :beer

Re: Retire at 55

Posted: Tue Dec 15, 2015 5:24 pm
by rob
garlandwhizzer wrote:The second key ingredient to this personal account is either a money market fund or a very short term, very high quality bond fund, a safe place from which you can draw funds without any tax consequences as money is needed.
I have not been following closely but with the changes happening in 2016 with the potential restrictions on money market funds... I think we all need to revisit where to keep safe stuff for emergencies. Vanguard is apparently moving the Fed MM to be the settlement acct for brokerage accounts. Certainly FDIC accts, short-term bonds etc are options (although that add taxable lots to track).

Re: Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Wed Dec 16, 2015 1:11 am
by dolphintraveler
I am not familiar with it, but there is also the SEPP (Substantially Equal Periodic Payments) / 72(t) option of withdrawing from your IRA's without penalty (or rolling a 401k into an IRA if your particular employer doesn't give the age 55 and not working option):

https://www.bogleheads.org/wiki/Substan ... c_payments

I like the concept because it means maxing out 401k (or 403b) contributions is still a great strategy. Saving in taxable is a bonus on top of that.

Re: Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Wed Dec 16, 2015 5:53 am
by 4nursebee
I want to echo that rule 72t SEPP is how one pulls money out penalty free from Roth,401k.

Re: Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Wed Dec 16, 2015 6:33 am
by vtMaps
Something else to consider... health care. If you are buying your insurance under the terms of the ACA, the premiums you pay and your out of pocket costs may be dependent upon your income. If you have enough money in taxable accounts, you can keep your income (retirement account distributions) low enough to save thousands of dollars per year in health care expenses.

If I could do it over, I would have put less money in IRAs and more money in Roth or taxable accounts.

--vtMaps

Re: Retire at 55

Posted: Wed Dec 16, 2015 7:05 am
by goGators
macheta wrote:Keystone - How would you withdrawal a Roth IRA contribution free of penalty prior to 59.5?
keystone wrote:I plan to retire at 49 and will use my taxable account to fund my expenses from 49 to 59.5.

Besides that, one can withdraw Roth IRA contributions free of penalty or they could withdraw per IRS 72(t).
Roth IRA Rules - Table Approach (from http://fairmark.com/forum/read.php?2,54159)
...
Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-Yes (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No Penalty-No
Conversions: Tax-No Penalty-No (Taxable Portion)
Conversions: Tax-No Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.
...

Re: Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Fri Aug 03, 2018 8:32 am
by KSOC
vtMaps wrote: Wed Dec 16, 2015 6:33 am Something else to consider... health care. If you are buying your insurance under the terms of the ACA, the premiums you pay and your out of pocket costs may be dependent upon your income. If you have enough money in taxable accounts, you can keep your income (retirement account distributions) low enough to save thousands of dollars per year in health care expenses.

If I could do it over, I would have put less money in IRAs and more money in Roth or taxable accounts.

--vtMaps
This! My employer closed my facility last year. I'm living off of wifes salary, severance, small inheritance & cash. I have zero income so far this year, may take some from 401k before end of '18 & probably some in '19. I tell anyone who'll listen don't neglect the taxables. Great advice!

Re: Retire at 55

Posted: Fri Aug 03, 2018 10:25 am
by marcopolo
garlandwhizzer wrote: Tue Dec 15, 2015 1:19 pm I retired at 50 and have a few suggestions about how to manage this situation.

First have a considerable sized personal non-tax deferred account made up of two components, tax efficient equity and cash. As for equity, TSM is incredibly tax efficient and throws off higher dividends than most high quality bond funds. It is a no-brainer for your equity position. Take equity distributions in cash and make up whatever extra money you need from selling equity and generating only long term capital gains. If your current equity position in personal account has multiple individual stocks or equity funds, sell them as needed in a tax efficient manner aiming to produce total income just below the next federal tax bracket cutoff. Move these assets in a tax efficient manner every year by selling these positions for cash to spend and any extra to the simplicity, maximal diversification, minimum cost, and maximal tax efficiency of unbeatable TSM. Tax loss harvest when possible in selling equities.

The second key ingredient to this personal account is either a money market fund or a very short term, very high quality bond fund, a safe place from which you can draw funds without any tax consequences as money is needed. Keep a minimum of 2 years of anticipated expenses in this account at all times, more if it helps you sleep at night. Use this account during market downturns to provide living expenses so you can avoid or minimize the sale of equities into market weakness. Sell equities from positions of relative market strength to periodically replenish this safe account.

If possible, provide living expenses from this personal account alone until required minimum distributions are come in at age 70.5. Thereafter make up whatever shortfall you have between required minimum distributions with this personal fund. If you start using your tax deferred account at 59.5 for expenses you'll be paying significantly more in taxes than by selling non-tax deferred personal investments that produce long term capital gains.

Another very key point, reduce living expenses and don't wait until you're retired to do it. Do not carry a high mortgage which has to be fed every month with lots of dollars. If possible own your own home outright so no monthly mortgage payment is needed. By lowering your income needs, your SS taxability and the ability to deduct medical expenses, charitable gifts, etc., from income tax is increased because the deductibility of these are tied to their percentage of total unadjusted income. Do not get in a position where you have to generate a huge amount of income monthly for living expenses which can get ugly for your portfolio in bear market downturns.

Most of the above, like having a considerable sized personal non-tax deferred account in addition to tax deferred accounts, cannot be done instantly when you retire. It has to planned for and achieved starting well before you quit your day job.

Finally if you're young and have a long time horizon until retirement, put at least some of your IRA contributions into Roth IRA, giving your tax-free money lots of time to grow. Maximize IRA and other tax deferred contributions. It is likely that due to the current gulf between US govt. obligations and tax revenues, eventually income taxes are likely to rise at some point in the future. Having the ability to tap into money without paying taxes to get at it is quite nice now and will likely be nicer in the future.

Garland Whizzer
Love most of this advice.

Not sure about the 2+ years in cash like vehicles in taxable account. First, research has shown it does not really help with sequence of return issues. Second, you are incurring higher tax rates on the interest income. I use most of the strategies outlined above, but keep my fixed income assets (bonds and CDs) in tax-deferred accounts. During down turns, I will still take money from taxable by selling in equities (if they are at a loss, I get a tax break!). But, if i want to really use cash like instruments during the draw down period, i will simply sell an equal amount of them in my tax-deferred account and buy, similar equities. So, i have effectively spent cash during the downturn without incurring the cost of holding them in taxable accounts.

From reading many of your very knowledgeable posts, I suspect you are aware of this strategy. Can you explain your rationale for holding cash like instruments in the taxable account rather than employing the strategy I described above, perhaps I am missing something?

Re: Retire at 55 [Which funds to use between 55 and 59.5?]

Posted: Fri Aug 03, 2018 10:36 am
by rgs92
If you get a single life SPIA (for life) with any amount taken from your tax-deferred accounts (non Roth IRAs), that will avoid penalties at any age. Of course, regular income taxes will be due on each payment. This will also take care of RMAs down the line.

So if you buy an SPIA for $100,000 in your 50s, you will get about $500 (or a bit less) a month for life as gross income (w/no penalties).