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Author: StockGoddess Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75378  
Subject: pre-59 investments? Date: 4/16/2006 5:43 PM
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So I've been piling money into my 401k for years and I recently realized that, if i wish to retire EARLY that's not going to do me any good - see 401k funds you have to wait until you're 59 if you want to avoid penalties.

When can you withdraw from ROTH's?

I guess there's the NORMAL investments - stocks, real estate - but for some reason I think of them as investments, but not RETIREMENT investments...because they're not tax-deferred or anything.

Just thinking out loud here.

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51216 of 75378
Subject: Re: pre-59 investments? Date: 4/16/2006 5:46 PM
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You always have the option of Section 72t early withdrawals from IRA's. And I believe there are circumstances when you can start distributions for a 401k at 55.


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Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51217 of 75378
Subject: Re: pre-59 investments? Date: 4/16/2006 5:56 PM
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Greetings,

So I've been piling money into my 401k for years and I recently realized that, if i wish to retire EARLY that's not going to do me any good - see 401k funds you have to wait until you're 59 if you want to avoid penalties.

Not totally true. http://www.retireearlyhomepage.com/wdraw59.html notes a loophole for 401(k)s that may be of interest.

When can you withdraw from ROTH's?

Depends on what you are withdrawing. The contributions can come out at any time while the earnings have to have been in there 5 years and you have to be 59.5 I think are the rules. http://www.irs.gov/pub/irs-pdf/p590.pdf should have more details straight from the IRS.

Just to clear up those points,
JB

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51219 of 75378
Subject: Re: pre-59 investments? Date: 4/16/2006 8:55 PM
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Retire, then roll over the 401k into an IRA, then take early withdrawals.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51229 of 75378
Subject: Re: pre-59 investments? Date: 4/17/2006 12:01 PM
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...see 401k funds you have to wait until you're 59 if you want to avoid penalties....>

It is probably age 55 for your 401k. As previosuly mentioned if you roll it out to an IRA you can also take the "substancially equal paymnet plan" option with restricitions.

If you have company stock be sure to check on the tax implications, sometimes it is best not to roll the company stock from a 401K to an IRA.

Greg

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Author: StockGoddess Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51237 of 75378
Subject: Re: pre-59 investments? Date: 4/17/2006 8:23 PM
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Retire, then roll over the 401k into an IRA, then take early withdrawals.

Loopholes!

I LOVE loopholes! Thanks!

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Author: kaudrey Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51241 of 75378
Subject: Re: pre-59 investments? Date: 4/18/2006 10:17 AM
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Hi,

I am planning to retire early also. I don't want to tap my 401(k) or rollover IRA early, because I want to save them in the anticipation of being retired for 30 or 40 years (women live long in my family).

So I also save in a taxable brokerage account. Doesn't matter if it is taxable, it's still retirement money to me.

If I retire at 52 like I plan to, I need about 7 years of living expenses in my taxable account to cover the time until I'm 59 1/2. I don't mind drawing down the taxable account, but I plan to live mostly off the income from the retirement accounts, not the principal. That's why I don't want to be drawing them down early. Lower balance=less income, not good!

Karen

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51242 of 75378
Subject: Re: pre-59 investments? Date: 4/18/2006 11:19 AM
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So I also save in a taxable brokerage account. Doesn't matter if it is taxable, it's still retirement money to me.


We actually have the bulk of our retirement savings in a taxable account. We also plan to retire early, and in order to be able to have enough money on which to live, we have to be saving somewhere other than in tax-deferred accounts because we need to be saving more than the limits will allow.

The added bonus of saving in the taxable account is that we can tap that money for other things like the kids' college or any other expense.

I think it's short-sighted to only save in a tax-deferred account for retirement as that won't give me enough funds to be able to retire early and live comfortably for the rest of my life.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51243 of 75378
Subject: Re: pre-59 investments? Date: 4/18/2006 11:31 AM
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>> I think it's short-sighted to only save in a tax-deferred account for retirement as that won't give me enough funds to be able to retire early and live comfortably for the rest of my life. <<

Maybe, maybe not. IRA withdrawals under Rule 72(t) are always an option even before age 59 1/2, and possibly a very good one if it keeps your withdrawals in the 15% tax bracket instead of larger RMDs being taxed at 28% or more.

#29

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51244 of 75378
Subject: Re: pre-59 investments? Date: 4/18/2006 11:48 AM
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Maybe, maybe not. IRA withdrawals under Rule 72(t) are always an option even before age 59 1/2, and possibly a very good one if it keeps your withdrawals in the 15% tax bracket instead of larger RMDs being taxed at 28% or more.


But that doesn't solve my problem of not being able to exceed the contribution limits on the tax-deferred accounts. My issue is not being able to withdraw it prior to 59 1/2. I know that I can do that under Rule 72(t). My issue is that there won't be enough money saved if I only make use of tax-deferred accounts. In order for there to be enough to support us in retirement, we need more than is allowed to be saved tax-deferred, hence I save much more in the taxable account than in the tax-deferred account.

To give you a rough idea, if I split up our retirement savings, there is about 1/3 in tax-deferred accounts and about 2/3 in taxable accounts, and we have maxed out retirement vehicles every single year since these things have existed.

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Author: dgalbraith100 Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51245 of 75378
Subject: Re: pre-59 investments? Date: 4/18/2006 3:08 PM
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There is another option that hasn't been mentioned yet, which I currently think is the better option.

Instead of using the 72t rule, when you retire, convert your 401K to an IRA. Then each year, convert the amount of money you need for your annual expenses into your Roth. At the conversion, you pay taxes for that years expenses. The money must sit in the Roth for 5 years, then it becomes a contribution, and you can withdraw it penalty and tax free.

So you are paying your taxes 5 years in advance (The one downside, all though right now I think it has its benifits since I think tax rates can only go higher, pay less now or more later :).

I'd actually convert more each year then just your annual up to the top of the bottom tax bracket :) (If your annual expenses are low enough to do that, which mine are). This allows you to pay the least amount of taxes possible and get the most money into the Roth.

The reason I prefer this is that you can stop converting at any point, unlike using the 72t and if you make a mistake, it doesn't turn into a $20,000-50,000 mistake where you owe all the back penalties due over the last 15 years :)

The two downside (that I can think of) are, you have to have 5 years of taxable expenses saved so you can gap the 5 year conversion window, and you are paying taxes on your money 5 years early. The first one is no big deal if you plan it out right, the second one currently is not a issue, but if tax rates go higher, and you think they may eventually come back down then you may want to play with other ideas.

Just my thoughts.

Laters,
-d.


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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51262 of 75378
Subject: Re: pre-59 investments? Date: 4/19/2006 9:06 AM
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The money must sit in the Roth for 5 years, then it becomes a contribution, and you can withdraw it penalty and tax free.

--------------------

Does this remain the case when the Roth account holder turns 59.5?

I was under the impression that after that magic age, you could withdraw any amount, any time, and pay no taxes.

You seem to be saying that the amount coverted at, say age 58, cannot be withdrawn taxfree until age 63.

Please clarify....


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Author: dgalbraith100 Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51279 of 75378
Subject: Re: pre-59 investments? Date: 4/19/2006 11:18 PM
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You seem to be saying that the amount coverted at, say age 58, cannot be withdrawn taxfree until age 63.

Please clarify....



That I do not actually know. I'm 34, so I'm so far way from the possiblity that I haven't even checked on it :) It would seem to make logical sense that you could take it out after you turn the magic 59.5, but logic and taxes are always a tricky bet.

Sorry,
-d.


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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51291 of 75378
Subject: Re: pre-59 investments? Date: 4/20/2006 11:39 AM
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Here is the official IRS Pub 590 wording:

What Are Qualified Distributions?
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the
first taxable year for which a contribution was made
to a Roth IRA set up for your benefit, and
2. The payment or distribution is:
a. Made on or after the date you reach age 591/2,
b. Made because you are disabled,
c. Made to a beneficiary or to your estate after your
death, or
d. One that meets the requirements listed under
First home under Exceptions in chapter 1 (up to a
$10,000 lifetime limit).


-------------------------

Above makes it clear, that once the oldest Roth Account reaches five years of age, and the Roth Account Owner becomes 59.5, the whole enchilda becomes taxfree regardless of when any money went in....

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