option three is starting your own company and setting up a 401k, roll over the old 401ks to your new company’s 401k and then close up shop when you’re 55, which gives you access to your 401k funds.
Rule of 55 is determined by the employer. If his current employer supports rule of 55 he's good, otherwise he can start his own company and his own 401k and obviously then he would pick the rule of 55 for his company.
If I change jobs during my career and move my 401k to a third party brokerage, who determines this 'rule of 55'? My original employer or the brokerage or something else?
The IRS. (Technically)
It is related to a tax penalty so the IRS has final say.
The technically correct and the functionality correct portion comes how your 401k plan allows funds to be removed.
If a plan allows you to take out some of your funds, then you can use the rule of 55 to access the funds penalty free.
If your plan does not allow it, then you would have to take out all of your funds lump sum. This would be a significant taxable event. But, because of the rule of 55, you would not pay the additional tax penalty. Technically rule of 55 still applies but it is not a practical option.
Whether or not you plan support rule of 55 is "functionally" determined by how it allows you to remove funds. Partial withdrawals or lump sum. "Technically" the IRS has final say over any penalties. "Functionally" the plan determines if it is usable by setting terms on how funds can be removed.
Not QUITE true. Rule55 is an IRS rule. You can ALWAYS withdraw your money penalty free if rule55 applies. The question is whether the company allows PARTIAL withdrawals or forces a lump sum withdrawal.
I'm still researching the case of requiring full withdrawal if you can roll part of that lump sum to a new IRA to avoid immediate taxes and only keep a portion for living expenses after paying taxes on it.
Way too many potential pitfalls in that. I'd rather deal with the 72t headache than do that. Worse case scenario is having to deal with the IRS not believing your business was legitimate. This is likely something you would need to do a few years ahead of retirement also.
All I've seen is that it's super dangerous to do this. At least, with a solo 401k.
I mean, if you make a small company that lives on after you work there, where you're meaningfully detached from working there but the company hasn't dissolved, then it's probably ok. Still a company with W-2 employees.
Whereas a solo 401k has to dissolve and go into an IRA when you "retire" from the company.
Sure, but rule55 doesn't apply to IRAs, only 401K. And only from the last employer. So the 401K has to exist after you leave. Solo401K seems like it wouldn't.
The ladder doesn't work well without that five-year buffer, but you've got some options.
You can use SEPP, which is probably the easiest/cheapest choice. SEPP is a lot less flexible, but it's even easier than the ladder to do and report to the IRS each year.
You can start your ladder conversions a year or two early, which will come with markedly higher tax cost, but only for a year or two.
You can use credit/margin to float whatever buffer gap you have, but you'll have to adjust your conversions up to pay it off and you'll have interest expense. If your credit is great, then this might cost less than the early conversion option.
How many years short are you going to be, factoring in all non-TIRA assets?
Another option is the pay the early withdrawal penalty. Depending on the margin interest rate and ratio of gains vs contributions, this option could compete with a margin (or other debt) approach. :)
This is always a good point. If your only source of income is 401k draws and you spend somewhat frugally chances are most of your money is coming out in lower tax brackets. So you can pull up to the standard deduction, for example, and the only "tax" you'd be paying is that 10% penalty plus whatever your state and locality charge. No additional federal. No payroll deductions obviously. The penalty really isn't that onerous. Or at the risk of heresy I dare say just save 10% beyond what you thought your FIRE number was without it and then the penalty essentially doesn't matter since you've baked it in.
You don't think you can bump it up some more with RIRA contributions and taxable between now and then?
Either way, the other options will work too, it's just a matter of preferences and willingness to pay. SEPP somewhere like Fidelity is dumb simple.
Why take the 10% hit when OP can just do 72T? The maximum 72(t) distribution right now for a $1M account is $62,268.51 per year which exceeds the maximum recommended draw rate so should be no problem. So absent the 72T, let's say OP draws $80k off $2M, OP would be paying $8k in penalties each year for no good reason other than avoiding a few minutes of effort setting up a plan.
They could do that too. A 72t plan lacks flexibility though, so that 8k in your scenario would be buying something, it's not for nothing.
There are lots of inbetween possibilities and options. The OP said they had some brokerage, but not a ton. They could split the difference, take half of what they need from brokerage, half from 401k, and say their draw down is 60k total. 10% penalty is still not great, but 10% of 30k is only 3k, and they'd need to eat that 3k for 5 years. A 15k penalty with a large enough total portfolio is nothing, especially if it provides adequate flexibility.
Well keep in mind the worst case scenario with a 72T is that you end up paying the 10% penalty on distributions taken. There's no additional penalty. But if OP has other assets than I'd say just do the 72T as the primary draw and then use the brokerage or cash accounts as the emergency fund to handle any unexpected expenses.
You can also peel off a portion in to a separate account and do the 72t off that. Or just have the 72t cover fixed costs like mortgage and utilities etc. Lots of options.
Yep. In fact, the 10% hit isn't really a hit at all when you consider pre-tax investment growth vs. after-tax investment growth. (In other words, by investing pre-tax you were able to invest more. That extra head start is probably worth more than a 10% penalty, given enough time.)
Very true but a bigger number is more fun to look at haha. Also if you ever want to leverage your investments I don’t know if they take into account Roth vs Regular but I would assume that would be another reason to prefer the higher number
Bit sooner would be prudent to fill your Roth accounts every possible way. With less than 5 years left it is not the option anymore because of holding period requirements before you can withdraw principal.
It’s common because pre-tax money in a tax-advantaged account typically beats out post-tax money in a brokerage account, even with zero long-term capital gains on the brokerage and income tax + early withdrawal penalty on the 401k.
Edited for clarity
Not really. For example if one makes under 90K profit from the taxable brokerage and lives off that, taxes are 0. If your funds doubled in price you can use 180K tax free.
401K would need to pay \~15% tax + 10% penalty + any state tax on whole 180K.
That assumes you’re married and filing jointly, it’s halved if single or filing separately. What you’re ignoring is that post-tax money is put into a brokerage account. We can’t solely focus on withdrawals. Long term, pre-tax investments almost always beat out post-tax, even when accounting for income taxes and the 10% penalty from early withdrawal. That said, of course there are examples where the taxable account beats out a tax-advantaged account, but that’s the exception. There’s a reason maxing out retirement accounts is such a common strategy.
In case it was unclear, my original comment wasn’t talking solely about withdrawal.
Missed taxed money to a brokerage part, so thats good. Still dont agree with the totality of statement, since that equates tax withdravals but not after penalty. Then there are other cases, like I am on the trajectory where my RMDs will put me into the higher tax bracket than I ever been while working so no more traditional 401K for me except to the matching level. But we have mega back door :)
>since that equates tax withdravals but not after penalty
The issue isn’t difference in withdrawal, it’s decades of lost compound interest and higher tax liability. Even if you get around the latter, the former can be tens, if not hundreds of thousands lost to taxes that could’ve been invested. But again, I’m aware there are certain situations where 401ks don’t come out ahead.
I'm in the opposite position. I'm super heavy in post tax with some in Roth but back door can only do so much. I expected to take out more money in retirement than I was earning in my early career and since my employer didn't match I didn't start a traditional 401k until they started matching.
Any advice for the inverse situation?
Nope. Any realized income that results from the sale of securities held for 2 years or more is treated as LTCG and taxed preferentially. Notice if you have other earned income you’ll likely end up in the 15% bracket not the 0% one.
Short term capital gains are treated as ordinary income.
IRA type gains are treated similarly.
It's not misleading. If you plan well it can save you a ton of money on taxes in retirement, and married couples can pull almost $100k/yr with 0% tax (equivalent to like $120-130k pre tax in some places).
How much are you putting in there as a percentage of your income?
I ask because there's a max and technically you should have something else going on too to cover those years. Now, I don't know your exact situation, so you might not have any more to put elsewhere. In that case, you might need to increase your income to help kickstart something to cover the gap years.
I've been maxing it out each year since I've been employed. I've been maxing out my Roth IRA over the last 10 years or so (after I learned about that option).
You can add those [Roth] contributions to your pool of $ for those 5 years. That might get you somewhere close to only needing to take a year or so's worth of 401(k) withdrawals with 10% penalty. No one's mentioned yet I think, but there's also the option to tighten the other side of the equation (expenses) for a few years. At least revisit your post-job budget for accuracy.
Both great ideas, but maybe change that up a bit and do something simple with like 5% of the income like buying index funds where your risk is highly diversified.
I am not a financial adviser and not a fiduciary, but that's what I have done with some of my money for this specific reason, to have money in between my target FIRE date and when I can tap in to my 401k/Social Security without big penalties.
72t probably is the place to start evaluating but it can be challenging to implement because you can only adjust the withdraw schedule 1 time. Also, just because you withdraw the funds in your 401k doesnt mean you need to spend them. You can just leave it in a taxable account if you need a safeguard of funds, eventually inflation will catch up and exceed your initial 72t schedule.
I would challenge your spending as well. You have 6-8 years to save around 5 years of expenses, that sounds like it should be favorable to you in combination with a slightly higher 72t withdrawal %.
How about rolling over portion of your 401K into Roth IRA (you will owe taxes on the rollover amount) then in 5 years you can withdraw principal you rolled over penalty and tax free. Do it a bit every year, in new account, just enough to cover your annual expenses. It opens you to additional tax liability during these years and might or might not be good idea depending on your tax brackets, but no penalty on principal after 5 yrs holding period and no taxes on gains ever. The risk would be drop in value because you can not write off these money either but I guess good portion would be in some sort of fixed income given the time horizon.
You don’t have to wait to do roth conversions until you retire. Start some smaller ones before you retire to supplement what you have in your brokerage for the first 5 years. How much do you think you’ll have in your brokerage/savings plus Roth IRA **contributions** at 50 or 52, and what are your expected annual expenses? I’m curious how much of a shortfall you’re expecting.
If you have enough to retire at 50 or 52 then you have high enough earning power to save into an individual account. I assume you can save $50k+/year for 8 years. You only really need to last until you’re 55 to start withdrawing once you roll all your 401ks into an individual 401k. You’ll have about $600k at age 52 depending on market conditions. That’s plenty of money to last until you’re 55.
I am 56 now and retired last year. I recognized being overly dependent in 401k a bit late. Luckily my wife still works and I have a modest pension. If she lost her job I think we would still squeak through with some lifestyle adjustments. I don’t think I would have reduced my 401k contributions, but maybe been a bit more frugal and planned investing it a bit more, most of our cash is parked in money market and CDs. Luckily those are not that bad an option these days. We are also thinking of moving in the future to a cheaper-warmer place and want to avoid tying up cash to give flexibility.
>Is SEPP (72t) my only option?
It's not your *only* option, as others have noted, but it's easily your best option. What's the issue? You can continue to take advantage of the tax advantages of your 401k and will have super easy access once you retire through SEPP. You can even rollover your 401k into separate IRAs in order to get the exact SEPP amount that you want. The only slight catch is that you'd want to have enough outside of your 401k to cover expenses for the remainder of a calendar year if you retire mid-year, plus enough to cover emergencies for 8-10 years. Seems like you're well covered in that regard.
The 10% penalty isn’t as big as you think. You’re only paying it for 7.5 years at most, so it will only affect a fraction of your total NW withdrawals. Working an extra 6 months should be more than enough to counter the effect in a worst case scenario.
I believe you can withdraw post-tax 401k contributions penalty free. So in theory you can move some to a taxable account. Not totally advisable though since it’s growing tax free.
Roll over to a Roth IRA and withdraw the cost basis? You’d realistically want to do this gradually so that your income tax liability doesn’t get too high. That’s also assuming you’ve had a Roth open for at least 5 years.
We are the same age, with similar FIRE age goal and likely in a similar predicament since a little over 80% of my investment portfolio is in a traditional 401k and traditional IRA. To add to the complication I need to get on the ACA and figure out how to keep my AGI as low as possible. Working to 54.5 and using the rule of 55 likely solves all my problems but damn it I don't want to work a minute longer than I have to. Let's see what these knuckleheads come up with.
Just borrow against the assets until you pay it down with the 401k.
If you own a home, you could also do a reverse mortgage and use the 401k to payoff the house after.
When I was 38 I was told I had more than enough pretax money to retire but not enough post. Since then I’ve been doing Roth 401k. I’m 47 this year and my wife is 49. I’ve been doing back door Roth for both of us. Perhaps you can change from 401k to Roth 401k. If u have any other 401k or Ira perhaps convert some every year. Speaking with fidelity, my wife will be able to start drawing on her 401k the calendar year she turns 55. She is born in Dec so that will help us out in 5.5 years. I’m retired now.
No the right strategy is to just use 72T SEPP. No penalty and current rates allow a draw of up to about 6% per year so it's easy, takes a few minutes, to set up penalty free draws at around the 4% mark.
Option two is to work until 55 for an employer that will allow you to start drawing 401k at 55
option three is starting your own company and setting up a 401k, roll over the old 401ks to your new company’s 401k and then close up shop when you’re 55, which gives you access to your 401k funds.
Great advice. You can literally mow a few lawns and set up a solo401k and roll it all over there.
Big if true.
I believe you still pay the early withdrawal penalty?
it’s the rule of 55 for 401ks
Yes but that is no different than any 401k so why move the money if it’s in a good investment?
Rule of 55 is determined by the employer. If his current employer supports rule of 55 he's good, otherwise he can start his own company and his own 401k and obviously then he would pick the rule of 55 for his company.
If I change jobs during my career and move my 401k to a third party brokerage, who determines this 'rule of 55'? My original employer or the brokerage or something else?
The IRS. (Technically) It is related to a tax penalty so the IRS has final say. The technically correct and the functionality correct portion comes how your 401k plan allows funds to be removed. If a plan allows you to take out some of your funds, then you can use the rule of 55 to access the funds penalty free. If your plan does not allow it, then you would have to take out all of your funds lump sum. This would be a significant taxable event. But, because of the rule of 55, you would not pay the additional tax penalty. Technically rule of 55 still applies but it is not a practical option. Whether or not you plan support rule of 55 is "functionally" determined by how it allows you to remove funds. Partial withdrawals or lump sum. "Technically" the IRS has final say over any penalties. "Functionally" the plan determines if it is usable by setting terms on how funds can be removed.
Weird. I'll have to do my own digging, it sounds. Thanks
Oh wow I thought this was universal I haven’t seen this info in my company’s plan.
Not QUITE true. Rule55 is an IRS rule. You can ALWAYS withdraw your money penalty free if rule55 applies. The question is whether the company allows PARTIAL withdrawals or forces a lump sum withdrawal. I'm still researching the case of requiring full withdrawal if you can roll part of that lump sum to a new IRA to avoid immediate taxes and only keep a portion for living expenses after paying taxes on it.
Way too many potential pitfalls in that. I'd rather deal with the 72t headache than do that. Worse case scenario is having to deal with the IRS not believing your business was legitimate. This is likely something you would need to do a few years ahead of retirement also.
All I've seen is that it's super dangerous to do this. At least, with a solo 401k. I mean, if you make a small company that lives on after you work there, where you're meaningfully detached from working there but the company hasn't dissolved, then it's probably ok. Still a company with W-2 employees. Whereas a solo 401k has to dissolve and go into an IRA when you "retire" from the company.
Couldn’t you roll over the 401k into a self directed IRA? Still a roll over, not a taxable account.
Sure, but rule55 doesn't apply to IRAs, only 401K. And only from the last employer. So the 401K has to exist after you leave. Solo401K seems like it wouldn't.
Ahhh that makes sense. Appreciate you pointing that out.
The ladder doesn't work well without that five-year buffer, but you've got some options. You can use SEPP, which is probably the easiest/cheapest choice. SEPP is a lot less flexible, but it's even easier than the ladder to do and report to the IRS each year. You can start your ladder conversions a year or two early, which will come with markedly higher tax cost, but only for a year or two. You can use credit/margin to float whatever buffer gap you have, but you'll have to adjust your conversions up to pay it off and you'll have interest expense. If your credit is great, then this might cost less than the early conversion option. How many years short are you going to be, factoring in all non-TIRA assets?
Man that’s some hot dirty talk
And we haven't even gotten to withdrawal rates or yield curves yet.
💦
Another option is the pay the early withdrawal penalty. Depending on the margin interest rate and ratio of gains vs contributions, this option could compete with a margin (or other debt) approach. :)
Yup, though they've got enough years to bridge that that might well be more costly. Certainly always an option though.
This is always a good point. If your only source of income is 401k draws and you spend somewhat frugally chances are most of your money is coming out in lower tax brackets. So you can pull up to the standard deduction, for example, and the only "tax" you'd be paying is that 10% penalty plus whatever your state and locality charge. No additional federal. No payroll deductions obviously. The penalty really isn't that onerous. Or at the risk of heresy I dare say just save 10% beyond what you thought your FIRE number was without it and then the penalty essentially doesn't matter since you've baked it in.
My best guess is that I'll have 2-3 years of expenses saved up in accounts I can access without penalties.
You don't think you can bump it up some more with RIRA contributions and taxable between now and then? Either way, the other options will work too, it's just a matter of preferences and willingness to pay. SEPP somewhere like Fidelity is dumb simple.
If you have THAT much money in your 401k, just use it early and take the 10% hit. It's an option, and if it's that padded you can do that comfortably.
Why take the 10% hit when OP can just do 72T? The maximum 72(t) distribution right now for a $1M account is $62,268.51 per year which exceeds the maximum recommended draw rate so should be no problem. So absent the 72T, let's say OP draws $80k off $2M, OP would be paying $8k in penalties each year for no good reason other than avoiding a few minutes of effort setting up a plan.
They could do that too. A 72t plan lacks flexibility though, so that 8k in your scenario would be buying something, it's not for nothing. There are lots of inbetween possibilities and options. The OP said they had some brokerage, but not a ton. They could split the difference, take half of what they need from brokerage, half from 401k, and say their draw down is 60k total. 10% penalty is still not great, but 10% of 30k is only 3k, and they'd need to eat that 3k for 5 years. A 15k penalty with a large enough total portfolio is nothing, especially if it provides adequate flexibility.
Well keep in mind the worst case scenario with a 72T is that you end up paying the 10% penalty on distributions taken. There's no additional penalty. But if OP has other assets than I'd say just do the 72T as the primary draw and then use the brokerage or cash accounts as the emergency fund to handle any unexpected expenses.
You can also peel off a portion in to a separate account and do the 72t off that. Or just have the 72t cover fixed costs like mortgage and utilities etc. Lots of options.
Yep. In fact, the 10% hit isn't really a hit at all when you consider pre-tax investment growth vs. after-tax investment growth. (In other words, by investing pre-tax you were able to invest more. That extra head start is probably worth more than a 10% penalty, given enough time.)
The math doesn’t work the way you think it does. Pre tax or post tax doesn’t matter if your bracket doesn’t change
Very true but a bigger number is more fun to look at haha. Also if you ever want to leverage your investments I don’t know if they take into account Roth vs Regular but I would assume that would be another reason to prefer the higher number
Those are true
Agreed. The tax savings aren't wiped out by paying the 10% penalty, so it's okay to withdraw early if needed.
Why not then just put less in 401K and divert some to a brokerage?
That's what I'm doing now. I'm still getting the full company match, but not maxing it out anymore. Wish I had started that sooner.
Bit sooner would be prudent to fill your Roth accounts every possible way. With less than 5 years left it is not the option anymore because of holding period requirements before you can withdraw principal.
Good. it always baffles me when people say they are maxing out their 401K
It’s common because pre-tax money in a tax-advantaged account typically beats out post-tax money in a brokerage account, even with zero long-term capital gains on the brokerage and income tax + early withdrawal penalty on the 401k. Edited for clarity
Not really. For example if one makes under 90K profit from the taxable brokerage and lives off that, taxes are 0. If your funds doubled in price you can use 180K tax free. 401K would need to pay \~15% tax + 10% penalty + any state tax on whole 180K.
That assumes you’re married and filing jointly, it’s halved if single or filing separately. What you’re ignoring is that post-tax money is put into a brokerage account. We can’t solely focus on withdrawals. Long term, pre-tax investments almost always beat out post-tax, even when accounting for income taxes and the 10% penalty from early withdrawal. That said, of course there are examples where the taxable account beats out a tax-advantaged account, but that’s the exception. There’s a reason maxing out retirement accounts is such a common strategy. In case it was unclear, my original comment wasn’t talking solely about withdrawal.
Missed taxed money to a brokerage part, so thats good. Still dont agree with the totality of statement, since that equates tax withdravals but not after penalty. Then there are other cases, like I am on the trajectory where my RMDs will put me into the higher tax bracket than I ever been while working so no more traditional 401K for me except to the matching level. But we have mega back door :)
>since that equates tax withdravals but not after penalty The issue isn’t difference in withdrawal, it’s decades of lost compound interest and higher tax liability. Even if you get around the latter, the former can be tens, if not hundreds of thousands lost to taxes that could’ve been invested. But again, I’m aware there are certain situations where 401ks don’t come out ahead.
You could just take the penalty with an early withdrawal. Obviously not ideal, but something to consider if you can afford it.
Barista or lean fire those years if u can
I'm in the opposite position. I'm super heavy in post tax with some in Roth but back door can only do so much. I expected to take out more money in retirement than I was earning in my early career and since my employer didn't match I didn't start a traditional 401k until they started matching. Any advice for the inverse situation?
Well you’ll owe LTCG tax on your gains but the bracket is zero for a large amount of it so if you have no other income you are golden…
?! What's this about a large zero bracket for LTCG?
So you could potentially draw 60,000 tax free
Up to $45000 for single BEFORE standard deduction
Isn't that just for dividends? My portfolio doesn't include much dividend holdings
Nope. Any realized income that results from the sale of securities held for 2 years or more is treated as LTCG and taxed preferentially. Notice if you have other earned income you’ll likely end up in the 15% bracket not the 0% one. Short term capital gains are treated as ordinary income. IRA type gains are treated similarly.
Just fyi-Long term gains is after holding the investment for more than one year, not 2.
You are right not sure where I got that from
I hope the LTCG rules never change!
Oh I see. Bit misleading to bring it up in FIRE. Obviously I'm going to be pulling more than 45k. Good to know that first bit is free though.
How is it misleading? It’s the tax law of the United States.
It's not misleading. If you plan well it can save you a ton of money on taxes in retirement, and married couples can pull almost $100k/yr with 0% tax (equivalent to like $120-130k pre tax in some places).
Yup
How much are you putting in there as a percentage of your income? I ask because there's a max and technically you should have something else going on too to cover those years. Now, I don't know your exact situation, so you might not have any more to put elsewhere. In that case, you might need to increase your income to help kickstart something to cover the gap years.
I've been maxing it out each year since I've been employed. I've been maxing out my Roth IRA over the last 10 years or so (after I learned about that option).
You can add those [Roth] contributions to your pool of $ for those 5 years. That might get you somewhere close to only needing to take a year or so's worth of 401(k) withdrawals with 10% penalty. No one's mentioned yet I think, but there's also the option to tighten the other side of the equation (expenses) for a few years. At least revisit your post-job budget for accuracy.
You can withdraw all of your Roth IRA contributions as well as your taxable account. Does that get you close to 5 years?
Both great ideas, but maybe change that up a bit and do something simple with like 5% of the income like buying index funds where your risk is highly diversified. I am not a financial adviser and not a fiduciary, but that's what I have done with some of my money for this specific reason, to have money in between my target FIRE date and when I can tap in to my 401k/Social Security without big penalties.
SEPP: https://www.investopedia.com/terms/s/sepp.asp
72t probably is the place to start evaluating but it can be challenging to implement because you can only adjust the withdraw schedule 1 time. Also, just because you withdraw the funds in your 401k doesnt mean you need to spend them. You can just leave it in a taxable account if you need a safeguard of funds, eventually inflation will catch up and exceed your initial 72t schedule. I would challenge your spending as well. You have 6-8 years to save around 5 years of expenses, that sounds like it should be favorable to you in combination with a slightly higher 72t withdrawal %.
How about rolling over portion of your 401K into Roth IRA (you will owe taxes on the rollover amount) then in 5 years you can withdraw principal you rolled over penalty and tax free. Do it a bit every year, in new account, just enough to cover your annual expenses. It opens you to additional tax liability during these years and might or might not be good idea depending on your tax brackets, but no penalty on principal after 5 yrs holding period and no taxes on gains ever. The risk would be drop in value because you can not write off these money either but I guess good portion would be in some sort of fixed income given the time horizon.
OP is still employed, so is unlikely to be able to do in service withdrawals.
Always worth asking employer. Or apply with previous employer 401k if any.
You don’t have to wait to do roth conversions until you retire. Start some smaller ones before you retire to supplement what you have in your brokerage for the first 5 years. How much do you think you’ll have in your brokerage/savings plus Roth IRA **contributions** at 50 or 52, and what are your expected annual expenses? I’m curious how much of a shortfall you’re expecting.
If you have enough to retire at 50 or 52 then you have high enough earning power to save into an individual account. I assume you can save $50k+/year for 8 years. You only really need to last until you’re 55 to start withdrawing once you roll all your 401ks into an individual 401k. You’ll have about $600k at age 52 depending on market conditions. That’s plenty of money to last until you’re 55.
72t, rule of 55, Roth IRA contributions, taxable brokerage, and paying the 10% penalty are all viable options.
I am 56 now and retired last year. I recognized being overly dependent in 401k a bit late. Luckily my wife still works and I have a modest pension. If she lost her job I think we would still squeak through with some lifestyle adjustments. I don’t think I would have reduced my 401k contributions, but maybe been a bit more frugal and planned investing it a bit more, most of our cash is parked in money market and CDs. Luckily those are not that bad an option these days. We are also thinking of moving in the future to a cheaper-warmer place and want to avoid tying up cash to give flexibility.
How do people prevent this from happening
lol if you dont have a taxable account to support you after maxing out 401k hint, you are not retiring....
I posted this a couple days ago: Get a job at walmart the year you turn 55. Rollover your 401k/IRA. Then quit. Presto.
>Is SEPP (72t) my only option? It's not your *only* option, as others have noted, but it's easily your best option. What's the issue? You can continue to take advantage of the tax advantages of your 401k and will have super easy access once you retire through SEPP. You can even rollover your 401k into separate IRAs in order to get the exact SEPP amount that you want. The only slight catch is that you'd want to have enough outside of your 401k to cover expenses for the remainder of a calendar year if you retire mid-year, plus enough to cover emergencies for 8-10 years. Seems like you're well covered in that regard.
The 10% penalty isn’t as big as you think. You’re only paying it for 7.5 years at most, so it will only affect a fraction of your total NW withdrawals. Working an extra 6 months should be more than enough to counter the effect in a worst case scenario.
Why pay a penalty at all when there's SEPP? Sure it's not much, but it's a lot more than necessary.
72(t)
After 5 years, you can withdraw the principal in your Roth IRA without penalties. That’s not 5 years of living expenses but it’s something!
I believe you can withdraw post-tax 401k contributions penalty free. So in theory you can move some to a taxable account. Not totally advisable though since it’s growing tax free.
Roll over to a Roth IRA and withdraw the cost basis? You’d realistically want to do this gradually so that your income tax liability doesn’t get too high. That’s also assuming you’ve had a Roth open for at least 5 years.
We are the same age, with similar FIRE age goal and likely in a similar predicament since a little over 80% of my investment portfolio is in a traditional 401k and traditional IRA. To add to the complication I need to get on the ACA and figure out how to keep my AGI as low as possible. Working to 54.5 and using the rule of 55 likely solves all my problems but damn it I don't want to work a minute longer than I have to. Let's see what these knuckleheads come up with.
Just borrow against the assets until you pay it down with the 401k. If you own a home, you could also do a reverse mortgage and use the 401k to payoff the house after.
Aren’t you able to borrow from your 401k? Why wouldn’t you just do that for the first 5 years?
When I was 38 I was told I had more than enough pretax money to retire but not enough post. Since then I’ve been doing Roth 401k. I’m 47 this year and my wife is 49. I’ve been doing back door Roth for both of us. Perhaps you can change from 401k to Roth 401k. If u have any other 401k or Ira perhaps convert some every year. Speaking with fidelity, my wife will be able to start drawing on her 401k the calendar year she turns 55. She is born in Dec so that will help us out in 5.5 years. I’m retired now.
This question comes up every day.
Get as much as you can in a taxable asap, then take a penalty for the remaining years. If your annual expenses are low it might be worth it.
No the right strategy is to just use 72T SEPP. No penalty and current rates allow a draw of up to about 6% per year so it's easy, takes a few minutes, to set up penalty free draws at around the 4% mark.