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I am 36 and hope to retire sometime in my early 50s. I have been maxing out my 401(k) and Roth, but hardly have anything in taxable accounts.

I understand that the minimum age for penalty-free-withdrawls from these accounts is 59 1/2. Or is there any dispensation for early retirees? Do I need to start focusing more on my taxable account to make it from 53 to 59?
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>> I understand that the minimum age for penalty-free-withdrawls from these accounts is 59 1/2. Or is there any dispensation for early retirees? Do I need to start focusing more on my taxable account to make it from 53 to 59? <<

There are (mostly) three strategies for dealing with penalty-free withdrawals before age 59 1/2.

(1) If you terminate employment no earlier than the year you turn age 55, withdrawals from your most recent employer's 401(k) plan are penalty-free starting at age 55. Since you wish to retire at 53, this may not help you.

(2) Increase investments in taxable accounts. If you let a good stock, stock fund or ETF "ride" and pay taxes on only long-term capital gains and dividends (as long as they're still given preferred treatment), then you're only paying 15% on that portion. Plus you don't have to deal with penalties for withdrawals before 59 1/2. Even if you retire after 59 1/2, taxable accounts are useful because they help you (along with 401Ks, traditional IRAs and Roth IRAs) to "engineer" as much income as you can at lower tax rates.

(3) Take "substantially equal periodic payments" (SEPP) from a traditional IRA using Rule 72(t). If you do this starting at age 53, you would have to continue this until age 59 1/2 (or five years, whichever is greater, which for you at 53 would be 59 1/2).

There's actually a fourth option -- withdraw the *contributions* from a Roth IRA (while you can't get to earnings in a Roth without penalty until 59 1/2, you can always withdraw the contributions -- you've already paid taxes on them). Personally I'd consider that a less preferable option to the others because it takes away some tax-free compounding of your portfolio, but it is nevertheless another option to generate retirement income before age 59 1/2.

#29
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I understand that the minimum age for penalty-free-withdrawls from these accounts is 59 1/2. Or is there any dispensation for early retirees? Do I need to start focusing more on my taxable account to make it from 53 to 59?

If you were willing to wait until Jan 2 of the year you turn 55 to retire from the company where you have a 401(k), you can take penalty-free withdrawals from your 401(k), rather than having to wait until 59 1/2.

IRAs and 401(k)s can also be accessed using SEPP (Substantially Equal Periodic Payments), aka 72(t) withdrawals. These must be continued for a minimum of 5 years or until you turn 59 1/2, whichever is longer.

However, having investments in a taxable account will allow you to structure your income to minimize your taxes more effectively, so starting to contribute more to taxable accounts would also be a good idea, even if you end up using one of the exceptions.

AJ
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If you want to retire in your early 50's you more than likely will HAVE to have something in taxable accounts. It is not usually possible to get enough money stashed in tax deferred accounts to support an early retirement.

--Peter
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Why not look into something other than paper money? How about a business, real estate etc? Get some kind of cash flow coming in that is not reliant on the market. I assume your 401k & Roth money is in some kind of stocks or funds.
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I am 36 and hope to retire sometime in my early 50s. I have been maxing out my 401(k) and Roth, but hardly have anything in taxable accounts.

I understand that the minimum age for penalty-free-withdrawls from these accounts is 59 1/2. Or is there any dispensation for early retirees? Do I need to start focusing more on my taxable account to make it from 53 to 59?



Monies in taxable accounts have a lot more flexibility than most folks think, especially with the current LT rate (15%). Especially since you are planning early retirement, I would definitely be funding taxable accounts as part of the retirement package.


Hohum
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Monies in taxable accounts have a lot more flexibility than most folks think, especially with the current LT rate (15%). Especially since you are planning early retirement, I would definitely be funding taxable accounts as part of the retirement package.

The 15% could expire at the end of 2008 unless they extend it.
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while you can't get to earnings in a Roth without penalty until 59 1/2, you can always withdraw the contributions -- you've already paid taxes on them

That part has always confused me. When I look at Roth info, they say that you can't withdraw before 59.5 without penalties, and then sometimes there is one sentence about withdrawing contributions at any time. Is there a definitive link on that info?
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When I look at Roth info, they say that you can't withdraw before 59.5 without penalties, and then sometimes there is one sentence about withdrawing contributions at any time. Is there a definitive link on that info?

IRS Publication 590. Look for the part on the ordering rules for "nonqualified" distributions.

Since Roth contributions are not tax deductible there is no tax consequence to withdrawing them. If you've withdrawn all your contributions any further nonqualified distributions will be subject to the 10% premature distribution penalty.

You can see how the calculation works in Part III of Form 8606.

Phil
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As some others have stated, having taxable accounts makes things easier for retiring early. I also plan to retire in my early 50s, and I save quite a bit in my taxable accounts (and max out my 401k). I don't want to touch my retirement accounts before 59 1/2 if I don't have to.
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I don't want to touch my retirement accounts before 59 1/2 if I don't have to.

Why not? I would advise keeping taxable income at the 15% marginal rate, but no more. If yu can take a few sheckles out today at 15%, that's bettger than taking the same amount later at 25%, no? Do the math. If your retirement income will put you in a higher bracket, it's worth considering.

cliff
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