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Planning on an early retirement? With consistent saving and disciplined spending, you can make it happen. Even if you don’t think you will retire early, you still may want to plan for it. Health issues and disability force workers into early retirement every year. A contingency plan can help you navigate a challenging situation.
Regardless of whether your early retirement is planned, leaving the working world at a young age can present a number of challenges. You have to fund a longer retirement, which could stretch your savings. You may have to wait years before you can file for Social Security and Medicare, which would force you to come up with creative alternatives.
Perhaps one of the biggest challenges is figuring out a way to generate income from your qualified retirement accounts, such as an IRA or a 401(k) plan. These accounts are popular because they offer tax-deferred growth.
However, that tax-favored treatment is contingent on you waiting until age 59½ to take a withdrawal. If you take a withdrawal before that age, you could face taxes and a 10 percent early distribution penalty.
Fortunately, there are ways to take income from your qualified plans even if you haven’t yet reached 59½. Below are three such strategies. If early retirement could be in the cards for you, it may be time to develop an income plan.
The IRS does allow you to take distributions from a qualified plan without facing the early distribution penalty, under a rule known as 72(t). Under Rule 72(t), you’re allowed to take substantially equal periodic payments from your qualified plan before age 59½.
The period must be the longer of five years and the time until you reach age 59½, and you cannot stop or pause the payments once you start them. Generally, your payments are calculated in advance so you know how much you must withdraw on a monthly or annual basis to stay in compliance with the rule.
The distributions are taxed according to your plan’s rules. For example, distributions from a 401(k) or a traditional IRA are taxed as income. If you follow the distribution schedule, however, you avoid the 10 percent penalty
Rule of 55
There’s another early distribution penalty exception for funds that are held in a 401(k) plan. It’s known as the Rule of 55. Under this rule, you can take funds out of your 401(k) plan before age 59½ without facing the early distribution penalty. You still have to pay taxes on the income, but you won’t be penalized.
To qualify, you must leave your job at age 55 or later. You can retire, quit, get fired or be laid off. Any termination of service qualifies. However, it’s important to remember that the rule applies only to the plan associated with your last employer. It doesn’t apply to 401(k) plans from previous jobs.
Roth IRA Withdrawals
The Roth IRA can also provide income flexibility before age 59½. Generally, early distributions from any IRA are subject to the 10 percent early distribution penalty. However, Roth IRAs allow you to withdraw your contributions at any time and for any reason. This is because Roth IRAs are funded with after-tax dollars. Since those contributions haven’t received special tax treatment, they aren’t subject to penalty.
If your funds are in a traditional IRA, you could do a Roth conversion. That’s a process in which you convert your traditional IRA funds into a Roth. You have to pay taxes on the converted amount, but you avoid the 10 percent penalty. Then you can withdraw your contributions from the Roth tax-free and penalty-free, if needed, before age 59½.
Ready to develop your early retirement strategy? Let’s talk about it. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16830 - 2017/7/17
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