How can I access my retirement savings earlier?

Retirement savings accounts like IRAs and 401 (k) offer many benefits for long-term savers. But one downside is that they usually freeze your investments until “retirement age,” which the IRS has decided to be 59 and a half. Withdrawing your funds before this age usually results in an early withdrawal penalty of 10%, with a few exceptions for specific expenses like buying a first home or paying large medical bills.

But if you are planning to retire earlier than usual and have a lot of money in your retirement accounts, you may want to start withdrawing those funds before age 59 1/2. Here’s how.

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Withdraw Roth contributions

If you have a Roth IRA, you can withdraw the amount you contributed at any time. The gains on these contributions must however remain blocked until 59 1/2 in order to avoid the penalty.

So if you diligently contribute $ 5,000 a year to your Roth IRA for 20 years, you can withdraw up to $ 100,000 before age 59 1/2 without penalty. Hopefully, your account has a lot more than that after 20 years of investing, and any higher income will continue to grow tax free.

Since you have already paid tax on these contributions, there is no additional tax on the withdrawal.

Remove Roth conversions

If you convert funds from a traditional IRA or other retirement account to a Roth IRA, you can withdraw the converted amount without penalty after five years. If you plan ahead, that means you can access any retirement savings within five years and avoid paying a penalty on the withdrawal.

The ability to pull out Roth conversions enables a strategy called the Roth Conversion Ladder. Each year, you convert the amount you think you need to meet your spending expectations from a Traditional IRA into a Roth. You will pay taxes when you convert.

Five years after the conversion, you will be able to start making annual withdrawals from your Roth IRA without penalty. For example, if you made a Roth conversion in 2021, you will be able to withdraw the amount you converted from early 2026.

Take advantage of the rule of 55

401 (k) plans have a special rule that says if you separate from your employer in the year you turn 55 or older, you can immediately start receiving 401 (k) distributions from that employer. This is commonly referred to as the Rule of 55.

If you want to access all of your retirement savings, you can transfer the old 401 (k) and IRAs into your current 401 (k) just before you retire from service. Then, when you quit your job, you can start making withdrawals without penalty. It is important to note that you should keep the funds you plan to withdraw in your most recent 401 (k) until you are 59 1/2, as the early withdrawal rule only applies to this account. specific.

One way to take advantage of this is to establish a 401 (k) solo for yourself if you can generate some form of business income. Many brokerage firms offer single master 401 (k) solo plans at no additional cost and a wide range of investment options. Make sure you choose a provider that will allow you to transfer the old 401 (k) and IRA into the 401 (k) solo.

The idea is that once you have all of your savings in solo 401 (k) all you need to do is stop making business income in the year you turn 55 or older. Then you can immediately start making withdrawals. Consult with your accountant to tailor a plan to your own situation and make sure you handle all the details properly.

Substantially equal periodic payments

Section 72

In order to use 72

Only pay the penalty if you owe

Here are some creative ways to access your retirement savings before age 59 1/2. While you can still pay the penalty and withdraw funds directly if you absolutely have to, proper planning will allow you to keep more of your money. If you plan things right, you may be able to retire sooner than you think.

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About Kristina McManus

Kristina McManus

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