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Author: sripper Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75643  
Subject: Funding Early Retirement Date: 9/4/1999 10:57 AM
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I'm 27 now and figure that with my 401k and Roth IRA accounts, I'll be able to retire between ages 45 and 50, in that I'll have enough in those accounts to live comfortably off the interest ad infinitum. However, I can't take distributions until I'm 59 1/2 (without penalties, which I don't want to incur) - so what am I supposed to live off in the interim? I've worked hard to get in this financial position so I could retire before I'm ancient, but now it seems that the rules will force me to keep working another 10-15 years even though I'll have enough saved to live off the interest at age 45-50. Any ideas?
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Author: FoolWAM One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13654 of 75643
Subject: Re: Funding Early Retirement Date: 9/4/1999 11:08 AM
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I don't want to rain on your parade, but remember that at age 45 or 50, you could easily live another 45 or 50 years in retirement. Make sure when you are projecting your retirement needs that you take into account a reasonable rate of return, inflation rate and tax rate. Social Security will most certainly be bust by then, so you will probably not want to count on that.

As far as early withdrawals are concerned, the 401(k) can be rolled to an IRA when you retire. The IRA can then be withdrawn from before age 59-1/2 using what is called substantially equal payements. The principal in your Roth IRA is always accessable tax free. As well if you are really able to save above and beyond your 401(k) and Roth, you may want to consider non-qualified vehicles like Variable Universal Life as a third leg.

Best wishes!

Alan McKnight, CFP

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13655 of 75643
Subject: Re: Funding Early Retirement Date: 9/4/1999 12:13 PM
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FoolWAM Date: 9/4/99 11:08 AM Number: 13654
As well if you are really able to save above and beyond your 401(k) and Roth, you may want to consider non-qualified vehicles like Variable Universal Life as a third leg.

You certainly have time to fund a "third leg" - your projected early retirement is still 20 years away. I like the flexibility of a simple brokerage account after you have funded the various standard retirement plans. It doesn't have tax deferral beyond using long term buy and hold, but it has great flexibility. You can time you gains and losses, your gains are taxed as capital gains, and you can use appreciated stock for charity and gifts. And you get to control the fees - many "tax-advantaged" plans are designed with heavy fee structures that sweep most of the advantages into the pockets of the plan providers.

I also recommend the board called The Early Retirement Home Page. Put it into the "Board" field near the bottom of the this page and hit "Find"

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13656 of 75643
Subject: Re: Funding Early Retirement Date: 9/4/1999 12:42 PM
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sripper asks,

I'm 27 now and figure that with my 401k and Roth IRA accounts, I'll be able to retire between ages 45 and 50, in that I'll have enough in those accounts to live comfortably off the interest ad infinitum. However, I can't take distributions until I'm 59 1/2 (without penalties, which I don't want to incur) - so what am I supposed to live off in the interim? I've worked hard to get in this financial position so I could retire before I'm ancient, but now it seems that the rules will force me to keep working another 10-15 years even though I'll have enough saved to live off the interest at age 45-50. Any ideas?

The Retire Early Home Page shows you how to do it. See link:

http://home.earthlink.net/~intercst/reindex.html

I retired in 1994 at age 38 using the techniques described on the Retire Early site.

intercst

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Author: spunkee37 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13674 of 75643
Subject: Re: Funding Early Retirement Date: 9/5/1999 9:57 PM
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FoolWam:

I was under the impression that the age of withdrawing money from a IRA or from a 401k without penalty are different in that the former is 59-1/2 while the latter is 55. In the IRA you can withdraw earlier by taking essentially equal amounts using some kind of formula; don't know if that holds true also for the 401k, but my understanding is that if you retire at 55, you can withdraw all or any portion of your money without penalty and without adhering to any schedule. Comments?

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13676 of 75643
Subject: Re: Funding Early Retirement Date: 9/5/1999 10:17 PM
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"No you can only roll over an IRA to a Roth and that's at your current tax bracket. If you use an LSD you have to make the post LSD funds LOOK like a Roth by investing in a tax managed index fund and hopefully not have to even spend the growth in it till you get a step-up in basis at death.
I hope this helps you . "

The 55 age for 401K withdrawal without penalty is valid if the person is no longer employeed at the company holding the 401K. A person can pull money from a 401K without penalty while still employed at the firm once they reach 59 1/2 without the 10% penalty.

BGP

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13725 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 8:35 AM
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Greetings, Spunkee37, and welcome. You asked:

<<I was under the impression that the age of withdrawing money from a IRA or from a 401k without penalty are different in that the former is 59-1/2 while the latter is 55. In the IRA you can withdraw earlier by taking essentially equal amounts using some kind of formula; don't know if that holds true also for the 401k, but my understanding is that if you retire at 55, you can withdraw all or any portion of your money without penalty and without adhering to any schedule. Comments?>>

Your understanding is essentially correct. To take a penalty-free distribution from a qualified retirement plan like a 401k you must be employed by and separate from the plan sponsor in the year you attain age 55. Move the money to an IRA, though, and you will be subject to IRA rules. The IRA age for a penalty-free withdrawal is age 59 1/2 unless you take payments under the "substantially equal periodic payment" rules.

Regards..Pixy

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13726 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 8:37 AM
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BGP writes:

<<The 55 age for 401K withdrawal without penalty is valid if the person is no longer employeed at the company holding the 401K. A person can pull money from a 401K without penalty while still employed at the firm once they reach 59 1/2 without the 10% penalty.>>

Just a comment here so folks understand the rules clearly. First, to use age 55 for a penalty-free distribution you must be employed by the plan sponsor and attain age 55 in the year of separation from that job. Second, a plan MAY (but does not have to) permit in-service distributions. If the plan does and the recipient is age 59 1/2 or older, the distribution will be panalty-free. An in-service distribution is an option of the plan, not a right of the participant.

Regards..Pixy



BGP

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Author: spunkee37 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13739 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 3:23 PM
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Pixy: Do you have to be 55, what about 56 or 57. What if you retire at 55, keep your money in the employer plan, & then decide you want the money at 58? No dice? Do we actually pay members of Congress to lay awake nights thinking of these convuluted rules?

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Author: spunkee37 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13740 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 3:39 PM
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Pixey: One more question...

If I do all you tell me I have to do to take possession of my 401k at 55 without penalty, how does this work? Say I had $100,000 in my 401 & retired at 55. Do I withdraw all of this money & roll it over unto an IRA (but you said I can't withdraw this money until it's 59-1/2 once this is done) or alternatively would I pay a hugh income tax bill on this lump sum distribution in one year? Do I have to leave it in my employer's plan & withdraw as needed? What if my former employer discontinues their 401 plan or whatever when I'm retired & age 56? Is here such a thing as a 401 rollover to keep ths money under the (supposedly) more age liberal 401 rules?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13742 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 4:44 PM
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Spunkee37 asks:

<<Pixy: Do you have to be 55, what about 56 or 57. What if you retire at 55, keep your money in the employer plan, & then decide you want the money at 58? No dice? Do we actually pay members of Congress to lay awake nights thinking of these convuluted rules?>>

No, you don't have to be exactly 55. All that's required is that you attain that age before you leave the job that has the retirement plan from which you desire to take penalty-free withdrawals. Thus, if you wish to work until 56, 57 or 58, that will have no impact because you have attained the magic retirement age for employer-provided retirement plans as relates to taking the money without penalty.

Actually, Congress pays a guy with green eye shades they keep looked in a windowless closet to come up with the rules.

Regards..Pixy



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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13743 of 75643
Subject: Re: Funding Early Retirement Date: 9/6/1999 4:50 PM
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Spunkee37 writes:

<<Pixey: One more question...

If I do all you tell me I have to do to take possession of my 401k at 55 without penalty, how does this work? Say I had $100,000 in my 401 & retired at 55. Do I withdraw all of this money & roll it over unto an IRA (but you said I can't withdraw this money until it's 59-1/2 once this is done) or alternatively would I pay a hugh income tax bill on this lump sum distribution in one year? Do I have to leave it in my employer's plan & withdraw as needed? What if my former employer discontinues their 401 plan or whatever when I'm retired & age 56? Is here such a thing as a 401 rollover to keep ths money under the (supposedly) more age liberal 401 rules?>>


Hey..That's more than one question!

Obviously, if you retire at age 55 and take all the money, then you will pay ordinary income taxes (but no penalty) based on that distribution in the year you take it. Some plans will allow you to take it in installments or on demand, and some won't. Some may say you have to take it all. In that case, you can take what you need for 4 to 5 years, pay taxes on that amount, and roll the rest to an IRA until you reach age 59 1/2. Anything you put in an IRA is subject to IRA rules. And the only way you can roll the money to another 401k plan is to go to work for another employer who has a 401k plan that accepts transfers from an old 401k plan.

Regards..Pixy

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13841 of 75643
Subject: Re: Funding Early Retirement Date: 9/10/1999 5:37 PM
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Speaking of 401K plans...

"Second, a plan MAY (but does not have to) permit in-service distributions. If the plan does and the recipient is age 59 1/2 or older, the distribution will be panalty-free. An in-service distribution is an option of the plan, not a right of the participant."


Thanks Pixy. Our plan has this capability. I did not realize it was optional. As the plan changes, as they do continuously around here, this will be a question I will ask.

BGP

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