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How to retire early without penalty?
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Logistically speaking, how would one retire early without getting hit with withdrawal penalties?
As far as I know, most tax-incentivised retirement accounts slap you with penalties for making withdrawals before retirement age.
Let's assume that I am 40 years old and have enough money in my 401k and Roth IRA to retire. I want to retire and live off of the growth of these funds. How would I make withdrawals from these accounts without incurring penalties?
I've seen plenty of guides on early retirement (FIRE), but I can't find material on actually retiring early.
united-states retirement early-retirement
edited 42 mins ago
0x499602D2
18517
asked 1 hour ago
ewiggin
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up vote
6
down vote
favorite
Logistically speaking, how would one retire early without getting hit with withdrawal penalties?
As far as I know, most tax-incentivised retirement accounts slap you with penalties for making withdrawals before retirement age.
Let's assume that I am 40 years old and have enough money in my 401k and Roth IRA to retire. I want to retire and live off of the growth of these funds. How would I make withdrawals from these accounts without incurring penalties?
I've seen plenty of guides on early retirement (FIRE), but I can't find material on actually retiring early.
united-states retirement early-retirement
edited 42 mins ago
0x499602D2
18517
asked 1 hour ago
ewiggin
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |Â
up vote
6
down vote
favorite
up vote
6
down vote
favorite
Logistically speaking, how would one retire early without getting hit with withdrawal penalties?
As far as I know, most tax-incentivised retirement accounts slap you with penalties for making withdrawals before retirement age.
Let's assume that I am 40 years old and have enough money in my 401k and Roth IRA to retire. I want to retire and live off of the growth of these funds. How would I make withdrawals from these accounts without incurring penalties?
I've seen plenty of guides on early retirement (FIRE), but I can't find material on actually retiring early.
united-states retirement early-retirement
edited 42 mins ago
0x499602D2
18517
asked 1 hour ago
ewiggin
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
Logistically speaking, how would one retire early without getting hit with withdrawal penalties?
As far as I know, most tax-incentivised retirement accounts slap you with penalties for making withdrawals before retirement age.
Let's assume that I am 40 years old and have enough money in my 401k and Roth IRA to retire. I want to retire and live off of the growth of these funds. How would I make withdrawals from these accounts without incurring penalties?
I've seen plenty of guides on early retirement (FIRE), but I can't find material on actually retiring early.
united-states retirement early-retirement
united-states retirement early-retirement
edited 42 mins ago
0x499602D2
18517
asked 1 hour ago
ewiggin
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 42 mins ago
0x499602D2
18517
asked 1 hour ago
ewiggin
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 42 mins ago
0x499602D2
18517
edited 42 mins ago
0x499602D2
18517
edited 42 mins ago
0x499602D2
18517
18517
asked 1 hour ago
ewiggin
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 1 hour ago
ewiggin
313
asked 1 hour ago
ewiggin
313
313
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
ewiggin is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |Â
add a comment |Â
3 Answers
3
active
oldest
votes
up vote
7
down vote
There is a provision for this. It’s called Sec 72(t) and it permits you to take annual withdrawals according to your age, for 5 years or age 59-1/2 whichever is later. Tax is due, but this avoids the 10% penalty.
Note - while not really part of the question, you should be aware that the 401(k) withdrawal has a fixed 20% withholding for taxes. Depending on your situation, this may set you up for a large refund. Better to use the IRA for withdrawals where you can adjust the tax withheld.
answered 27 mins ago
JoeTaxpayer♦
141k21223456
add a comment |Â
up vote
2
down vote
You are assuming that the funds saved for your retirement must all be in specific tax accounts at the outset.
First of all, you should be wary of the difference between your investment portfolio (ie: which stocks/bonds/etc. you invest in), and the investment 'vehicles' that you use to make those investments (ie: 401k vs IRA etc.).
This distinction is especially important when reading information online, which may not be based on your jurisdiction, and therefore won't incorporate the tax concerns you may be having.
Whether any of this matters to you will depend on how much you have already invested through 'tax deferred' vehicles (not all of which penalize you for early withdrawal).
If you have a specific question about your specific financial situation + goals + tax jurisdiction, you should ask that separately.
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
add a comment |Â
up vote
2
down vote
How would I make withdrawals from these accounts without incurring penalties?
There is one piece that might be tapped without penalty, and that is your contributions to your Roth IRA. If you have had a Roth IRA for at least 5 years (starting from the first contribution to a Roth IRA) then you can withdraw your contributions without penalty. There are other cases as well (e.g. paying for secondary education expenses) so if you can just use the "retirement" funds for those activities and cash flow your actual "retirement" then you can avoid some penalties, but there's nothing specific to FIRE that avoids them.
However, I would say that if your goal is to "retire" before 59 1/2, then IRAs might not be the best vehicle for you. You can always contribute to other investments (real estate, non-retirement investment accounts) that do not have such restrictions.
I do not foresee any changes to the tax laws to accommodate FIRE since it will be difficult (if not impossible) to distinguish between "retire early" withdrawals and "I am not retiring but want my money now" withdrawals.
answered 28 mins ago
D Stanley
47.4k7143153
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
add a comment |Â
3 Answers
3
active
oldest
votes
3 Answers
3
active
oldest
votes
active
oldest
votes
active
oldest
votes
up vote
7
down vote
There is a provision for this. It’s called Sec 72(t) and it permits you to take annual withdrawals according to your age, for 5 years or age 59-1/2 whichever is later. Tax is due, but this avoids the 10% penalty.
Note - while not really part of the question, you should be aware that the 401(k) withdrawal has a fixed 20% withholding for taxes. Depending on your situation, this may set you up for a large refund. Better to use the IRA for withdrawals where you can adjust the tax withheld.
answered 27 mins ago
JoeTaxpayer♦
141k21223456
add a comment |Â
up vote
7
down vote
There is a provision for this. It’s called Sec 72(t) and it permits you to take annual withdrawals according to your age, for 5 years or age 59-1/2 whichever is later. Tax is due, but this avoids the 10% penalty.
Note - while not really part of the question, you should be aware that the 401(k) withdrawal has a fixed 20% withholding for taxes. Depending on your situation, this may set you up for a large refund. Better to use the IRA for withdrawals where you can adjust the tax withheld.
answered 27 mins ago
JoeTaxpayer♦
141k21223456
add a comment |Â
up vote
7
down vote
up vote
7
down vote
There is a provision for this. It’s called Sec 72(t) and it permits you to take annual withdrawals according to your age, for 5 years or age 59-1/2 whichever is later. Tax is due, but this avoids the 10% penalty.
Note - while not really part of the question, you should be aware that the 401(k) withdrawal has a fixed 20% withholding for taxes. Depending on your situation, this may set you up for a large refund. Better to use the IRA for withdrawals where you can adjust the tax withheld.
answered 27 mins ago
JoeTaxpayer♦
141k21223456
There is a provision for this. It’s called Sec 72(t) and it permits you to take annual withdrawals according to your age, for 5 years or age 59-1/2 whichever is later. Tax is due, but this avoids the 10% penalty.
Note - while not really part of the question, you should be aware that the 401(k) withdrawal has a fixed 20% withholding for taxes. Depending on your situation, this may set you up for a large refund. Better to use the IRA for withdrawals where you can adjust the tax withheld.
answered 27 mins ago
JoeTaxpayer♦
141k21223456
edited 12 mins ago
answered 27 mins ago
JoeTaxpayer♦
141k21223456
answered 27 mins ago
JoeTaxpayer♦
141k21223456
answered 27 mins ago
JoeTaxpayer♦
141k21223456
141k21223456
add a comment |Â
add a comment |Â
up vote
2
down vote
You are assuming that the funds saved for your retirement must all be in specific tax accounts at the outset.
First of all, you should be wary of the difference between your investment portfolio (ie: which stocks/bonds/etc. you invest in), and the investment 'vehicles' that you use to make those investments (ie: 401k vs IRA etc.).
This distinction is especially important when reading information online, which may not be based on your jurisdiction, and therefore won't incorporate the tax concerns you may be having.
Whether any of this matters to you will depend on how much you have already invested through 'tax deferred' vehicles (not all of which penalize you for early withdrawal).
If you have a specific question about your specific financial situation + goals + tax jurisdiction, you should ask that separately.
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
add a comment |Â
up vote
2
down vote
You are assuming that the funds saved for your retirement must all be in specific tax accounts at the outset.
First of all, you should be wary of the difference between your investment portfolio (ie: which stocks/bonds/etc. you invest in), and the investment 'vehicles' that you use to make those investments (ie: 401k vs IRA etc.).
This distinction is especially important when reading information online, which may not be based on your jurisdiction, and therefore won't incorporate the tax concerns you may be having.
Whether any of this matters to you will depend on how much you have already invested through 'tax deferred' vehicles (not all of which penalize you for early withdrawal).
If you have a specific question about your specific financial situation + goals + tax jurisdiction, you should ask that separately.
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
add a comment |Â
up vote
2
down vote
up vote
2
down vote
You are assuming that the funds saved for your retirement must all be in specific tax accounts at the outset.
First of all, you should be wary of the difference between your investment portfolio (ie: which stocks/bonds/etc. you invest in), and the investment 'vehicles' that you use to make those investments (ie: 401k vs IRA etc.).
This distinction is especially important when reading information online, which may not be based on your jurisdiction, and therefore won't incorporate the tax concerns you may be having.
Whether any of this matters to you will depend on how much you have already invested through 'tax deferred' vehicles (not all of which penalize you for early withdrawal).
If you have a specific question about your specific financial situation + goals + tax jurisdiction, you should ask that separately.
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
You are assuming that the funds saved for your retirement must all be in specific tax accounts at the outset.
First of all, you should be wary of the difference between your investment portfolio (ie: which stocks/bonds/etc. you invest in), and the investment 'vehicles' that you use to make those investments (ie: 401k vs IRA etc.).
This distinction is especially important when reading information online, which may not be based on your jurisdiction, and therefore won't incorporate the tax concerns you may be having.
Whether any of this matters to you will depend on how much you have already invested through 'tax deferred' vehicles (not all of which penalize you for early withdrawal).
If you have a specific question about your specific financial situation + goals + tax jurisdiction, you should ask that separately.
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
answered 44 mins ago
Grade 'Eh' Bacon
17.9k74867
17.9k74867
add a comment |Â
add a comment |Â
up vote
2
down vote
How would I make withdrawals from these accounts without incurring penalties?
There is one piece that might be tapped without penalty, and that is your contributions to your Roth IRA. If you have had a Roth IRA for at least 5 years (starting from the first contribution to a Roth IRA) then you can withdraw your contributions without penalty. There are other cases as well (e.g. paying for secondary education expenses) so if you can just use the "retirement" funds for those activities and cash flow your actual "retirement" then you can avoid some penalties, but there's nothing specific to FIRE that avoids them.
However, I would say that if your goal is to "retire" before 59 1/2, then IRAs might not be the best vehicle for you. You can always contribute to other investments (real estate, non-retirement investment accounts) that do not have such restrictions.
I do not foresee any changes to the tax laws to accommodate FIRE since it will be difficult (if not impossible) to distinguish between "retire early" withdrawals and "I am not retiring but want my money now" withdrawals.
answered 28 mins ago
D Stanley
47.4k7143153
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
add a comment |Â
up vote
2
down vote
How would I make withdrawals from these accounts without incurring penalties?
There is one piece that might be tapped without penalty, and that is your contributions to your Roth IRA. If you have had a Roth IRA for at least 5 years (starting from the first contribution to a Roth IRA) then you can withdraw your contributions without penalty. There are other cases as well (e.g. paying for secondary education expenses) so if you can just use the "retirement" funds for those activities and cash flow your actual "retirement" then you can avoid some penalties, but there's nothing specific to FIRE that avoids them.
However, I would say that if your goal is to "retire" before 59 1/2, then IRAs might not be the best vehicle for you. You can always contribute to other investments (real estate, non-retirement investment accounts) that do not have such restrictions.
I do not foresee any changes to the tax laws to accommodate FIRE since it will be difficult (if not impossible) to distinguish between "retire early" withdrawals and "I am not retiring but want my money now" withdrawals.
answered 28 mins ago
D Stanley
47.4k7143153
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
add a comment |Â
up vote
2
down vote
up vote
2
down vote
How would I make withdrawals from these accounts without incurring penalties?
There is one piece that might be tapped without penalty, and that is your contributions to your Roth IRA. If you have had a Roth IRA for at least 5 years (starting from the first contribution to a Roth IRA) then you can withdraw your contributions without penalty. There are other cases as well (e.g. paying for secondary education expenses) so if you can just use the "retirement" funds for those activities and cash flow your actual "retirement" then you can avoid some penalties, but there's nothing specific to FIRE that avoids them.
However, I would say that if your goal is to "retire" before 59 1/2, then IRAs might not be the best vehicle for you. You can always contribute to other investments (real estate, non-retirement investment accounts) that do not have such restrictions.
I do not foresee any changes to the tax laws to accommodate FIRE since it will be difficult (if not impossible) to distinguish between "retire early" withdrawals and "I am not retiring but want my money now" withdrawals.
answered 28 mins ago
D Stanley
47.4k7143153
How would I make withdrawals from these accounts without incurring penalties?
There is one piece that might be tapped without penalty, and that is your contributions to your Roth IRA. If you have had a Roth IRA for at least 5 years (starting from the first contribution to a Roth IRA) then you can withdraw your contributions without penalty. There are other cases as well (e.g. paying for secondary education expenses) so if you can just use the "retirement" funds for those activities and cash flow your actual "retirement" then you can avoid some penalties, but there's nothing specific to FIRE that avoids them.
However, I would say that if your goal is to "retire" before 59 1/2, then IRAs might not be the best vehicle for you. You can always contribute to other investments (real estate, non-retirement investment accounts) that do not have such restrictions.
I do not foresee any changes to the tax laws to accommodate FIRE since it will be difficult (if not impossible) to distinguish between "retire early" withdrawals and "I am not retiring but want my money now" withdrawals.
answered 28 mins ago
D Stanley
47.4k7143153
answered 28 mins ago
D Stanley
47.4k7143153
answered 28 mins ago
D Stanley
47.4k7143153
answered 28 mins ago
D Stanley
47.4k7143153
47.4k7143153
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
add a comment |Â
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
I think his intent is to retire now, so it's too late to change investment strategies to build up the nest egg in non-qualified accounts.
– Barmar
12 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
@Barmar I agree, my point was that these things should be considered when deciding to follow a FIRE plan.
– D Stanley
9 mins ago
add a comment |Â
ewiggin is a new contributor. Be nice, and check out our Code of Conduct.
ewiggin is a new contributor. Be nice, and check out our Code of Conduct.
ewiggin is a new contributor. Be nice, and check out our Code of Conduct.
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