Withdrawal Strategy Before 59.5

[brian313313]

I quit work 3 months ago. In Excel, I have enough that I should not need to go back to work. However, I have not accounted for the fact that most of my cash is in retirement accounts. I have not accounted for a 10% withdrawal penalty. I have enough for a few years outside 401k. What strategies should I be looking at to avoid the 10% penalty? (If anything...) I'm currently 51.5 so 8 years before non-penalized withdrawals. I have enough outside 401k to cover a little over three years.

A similar question, what should a withdrawal strategy be? I'm not sure if I should take out the entire year or a few months at a time. My allocation is currently 100% S&P 500 and cash for a few months bills. I just sold enough funds to cover about another three months bills.

Thanks.

[TheAnonOne]

Well, you can look up equal distribution payments (name?) Or the roth ladder but the roth ladder is a 5 year deal...

[brian313313]

Thank you. The SEPP is exactly what I need. I can wait until my non-401k assets are depleted before I do that though.

[Financial.Velociraptor]

See the sticky thread at the top of Investor Alley forum: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

[terran]

Remember that with SEPP you need to be careful as if you mess up and don't take the appropriate amount for the duration (until you're 59.5 I think) you will owe penalties for all withdrawals. Otherwise, it's a good option though.

Converting to roth and then withdrawing after a 5 year "seasoning" period is a nice, more flexible option, but it does require having enough outside retirement accounts (plus previous roth contributions, but not gains) to live off of and pay taxes on the conversions. Sounds like it's too late for the OP, but for anyone who can plan ahead to have at least 5 years of expenses plus taxes in brokerage accounts and Roth contributions, it's a good way to go.

More details on both of these strategies can be found in this sticky post at the top of the investing forum: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ (edit: Financial.Velociraptor beat me to it)

[Bird In Hand]

I quit work 3 months ago. In Excel, I have enough that I should not need to go back to work. However, I have not accounted for the fact that most of my cash is in retirement accounts. I have not accounted for a 10% withdrawal penalty. I have enough for a few years outside 401k. What strategies should I be looking at to avoid the 10% penalty? (If anything...) I'm currently 51.5 so 8 years before non-penalized withdrawals. I have enough outside 401k to cover a little over three years.

A similar question, what should a withdrawal strategy be? I'm not sure if I should take out the entire year or a few months at a time. My allocation is currently 100% S&P 500 and cash for a few months bills. I just sold enough funds to cover about another three months bills.

IMO you're in the perfect position for SEPP.  You'll have to take SEPP payments for at least 5 years no matter when you start.  In your case it sounds like you'd need to start taking them when you run out of taxable money -- about 5 years before you turn 59.5 -- so you're not locked into it longer than you need to be.

As long as you execute the rules correctly -- dot those T's and cross the I's for heaven's sake! -- I think it's a solid strategy to avoid a needless 10% penalty.

Depending on your tax/income situation, you might consider starting SEPP a little early.  You could take out just enough to reach the standard deduction each year, then supplement the rest of your income needs with 0% LTG from your taxable accounts.  As a bonus, your taxable accounts wouldn't be completely exhausted quite so soon.

[brian313313]

Thanks everyone for all the feedback.

[Abe Froman]

I'd like to piggy back on this. I have a friend that I commiserate with about early retirement dreaming. And he is much younger yet closer to FI than I am by many links - but I told him I would punt this to the MMM crowd to get their opinion. For this exercise and to keep his anonymity - lets call him Cameron. The question is this....

Are Cameron's balances in the right scale relative to each other to help with an early retirement or possible gap retirement ?

• He states both he and his wife are 15 years from being able to tap their retirement accounts which collectively hold roughly $1.3M. This makes him around 44 jealous.
• He also holds about $500K in taxable accounts.
• Their average annual spend is $60000.

Basic FireCalc and cFireSim runs tell him that he is at 100% probability for his total $1.8M to last and, if he sets a floor spend of $60K (adjusted for inflation), it is still at 97% probability of success. BUT
Basic goezintahs tells you his annual $60K spend will only last 8.3 years when pulled from his Taxable account. Leaving a 7 year gap between depletion of taxable and being able to access retirement. Not to mention that that $60K is typically N+3% every year.

Is there any guidance you can provide that helps in this case? Prefer not to hit the SEPP approach on year 7 when taxable runs out. Is there some calculation that will help determine if 500K can support 10 years with growth?

[terran]

Is there any guidance you can provide that helps in this case? Prefer not to hit the SEPP approach on year 7 when taxable runs out. Is there some calculation that will help determine if 500K can support 10 years with growth?

He should do Roth conversions both for tax minimization throughout his life and so he doesn't have to worry about running out of accessible money. As long as his taxable can last 5 years (no reason to think it won't) he'll be just fine. See the thread linked to earlier in this thread: https://forum.mrmoneymustache.com/post-fire/withdrawal-strategy-before-59-5/msg2089034/#msg2089034

[Blackbeard]

@Abe Froman Am I Cameron 😜That is almost exactly what I plan to do and same age range.  As mentioned I知 planning on doing some Roth Ladders as my income dwindles.  I知 hoping to stretch it out so I don稚 have to hit the 401k until I hit normal age.

So I知 as confident as I can be it値l work.  So confident my company just announced my retirement today.

[dude]

72(t) withdrawals.

[Abe Froman]

So I知 as confident as I can be it値l work.  So confident my company just announced my retirement today.

Congratulations !!! So what does it feel like? Like jumping off a cliff? Any major hurdles (head-wise) that you had to overcome - or were you working your plan to this point?

[BigMoneyJim]

Ooh, I'm relevant! After long-assuming I'd go the 72(t) SEPP route were I to retire early enough, I am now seriously looking at semi-retiring just before age 50--I'm 48.5 now--and most of my money is in retirement accounts, too. I have a pension beginning in 2025.

So with a pension kicking in halfway through my 50s and my intention to supplement withdrawals with earned income of unpredictable sorts, I can't reasonably commit to an SEPP that is likely to make sense for me for 11 years.

I looked into Roth laddering and a couple of other things and finally just decided I'll take the 10% penalty since I expect to be in the 12% or lower tax bracket when I do.

Although I just had an interesting thought while typing this...2025 is early for the pension. I suppose I could play with numbers and see what happens if I take the pension at 60 and aim for SEPPs in my 50s, but surely that will impact portfolio survivability.

Anyway, here is an article comparing various ways to tap retirement accounts early: https://www.madfientist.com/how-to-access-retirement-funds-early/

[terran]

I looked into Roth laddering and a couple of other things and finally just decided I'll take the 10% penalty since I expect to be in the 12% or lower tax bracket when I do.

Even if you take the penalty during the first five years, do the math on what it would look like if you also converted enough during those five years to get the conversion ladder going. For example, if you're not going to use up the 12% bracket with withdrawals, then you should certainly convert up to the top of the 12% bracket so you'll be able to withdraw those conversions after five years without the penalty.

[BigMoneyJim]

Even if you take the penalty during the first five years, do the math on what it would look like if you also converted enough during those five years to get the conversion ladder going. For example, if you're not going to use up the 12% bracket with withdrawals, then you should certainly convert up to the top of the 12% bracket so you'll be able to withdraw those conversions after five years without the penalty.

Fair enough. I've been mainly focused on primary withdrawal strategy, but it has been in the back of my mind to see about doing this if I find that I'm worried about the impact of required minimum distributions at 70.5. But I suppose even the opportunistic laddering could start adding up to penalty reduction, especially over 9-11 years. Get rich $10 at a time, right?

[Mother Fussbudget]

See the sticky thread at the top of Investor Alley forum: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

+1.  Exactly this.

A strategy one *could* use is [that I've read about, but never seen discussed here] is to take advantage of the 401K 'Rule of 55' - leave service from the company into which one is currently paying into their employee contribution 401K anytime in the year WHEN THE CONTRIBUTOR WOULD REACH 55 years old, and that person can withdraw from their 401K without penalty.  Note that some plans only allow the rule of 55 as a 'full distribution'.

How would one who retired at 51-1/2 take advantage of this?  Tricky. 

1)  Go back to work in their 54th or 55th year,
2)  Verify the company's 401K plan supports the "rule of 55",
3)  Work long enough to qualify for, and Join the new 401k plan,
4)  Transfer the balance from their OLD 401K plan into the NEW 401K plan,
[NOTE:  even rollover-IRA's can be rolled back into 401K's as long as the funds came from prior 401K plans]
5)  Work until January of the year they turn 55,
6)  'Leave Service', and withdraw funds from the plan without penalty using the Rule of 55.

[SummerLovin]

See the sticky thread at the top of Investor Alley forum: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

+1.  Exactly this.

A strategy one *could* use is [that I've read about, but never seen discussed here] is to take advantage of the 401K 'Rule of 55' - leave service from the company into which one is currently paying into their employee contribution 401K anytime in the year WHEN THE CONTRIBUTOR WOULD REACH 55 years old, and that person can withdraw from their 401K without penalty.  Note that some plans only allow the rule of 55 as a 'full distribution'.

How would one who retired at 51-1/2 take advantage of this?  Tricky. 

1)  Go back to work in their 54th or 55th year,
2)  Verify the company's 401K plan supports the "rule of 55",
3)  Work long enough to qualify for, and Join the new 401k plan,
4)  Transfer the balance from their OLD 401K plan into the NEW 401K plan,
[NOTE:  even rollover-IRA's can be rolled back into 401K's as long as the funds came from prior 401K plans]
5)  Work until January of the year they turn 55,
6)  'Leave Service', and withdraw funds from the plan without penalty using the Rule of 55.

This might work but the sticky parts are:
* Getting hired after 50
* Ability to get the inside info: Does the company allows rollovers; what are the plan offerings (expense ratios); waiting period, and most importantly- if the new 401k allows for partial withdrawals or lump sum only?
The "rule of 55" isn't a company specific thing, it's IRS driven. (Although some companies offer it as a retirement option in combination with x years of service)  You're just trying to use the IRS rule to avoid the 10%penalty, which only requires that you have left the company in which the 401k sits in the year you turn 55.

[Acastus]

I FIREd this year at age 56, so the rule of 55 is perfect for me.

The main strategies I have seen:
1. Take your lumps with the 10% penalty. It will only be for a couple years, and you should be in a low tax bracket, so it will not be all that bad.
2. Use the equal payment withdrawal. Downside is you need to take the withdrawal until you reach 59.5, regardless of how your life turns out. If you stop, all withdrawals becomes penalized at 10%. The CFP's I have talked to have steered me away from this, because it is very easy to get it wrong.
3. Get a job for a year. The timing is to qualify for their 401k the calendar year you turn 55. There is usually a delay in qualifying, so you can likely start the job at 54. It needs to be a contract or standard W2 job so you qualify for the 401k. If you cannot find something in your field, try librarian, Barnes & Noble, supermarket, or big box store. You only need part time to get the bennies in many cases.

I like #3. I found a full time job in 2011 at age 49, and kept it for 7 years until I quit. We hired a Chemical Analyst aged 66 while I was there. Unless you are unskilled, I think you can scare up work as long as you are willing to look for 6-12 months or take a menial job. "I tried retirement, and I did not like it," plays surprisingly well, even if you don't really mean it.

[Acastus]

I FIREd this year at age 56, so the rule of 55 is perfect for me.

The main strategies I have seen:
1. Take your lumps with the 10% penalty. It will only be for a couple years, and you should be in a low tax bracket, so it will not be all that bad.
2. Use the equal payment withdrawal. Downside is you need to take the withdrawal until you reach 59.5, regardless of how your life turns out. If you stop, all withdrawals becomes penalized at 10%. The CFP's I have talked to have steered me away from this, because it is very easy to get it wrong.
3. Get a job for a year. The timing is to qualify for their 401k the calendar year you turn 55. There is usually a delay in qualifying, so you can likely start the job at 54. It needs to be a contract or standard W2 job so you qualify for the 401k. If you cannot find something in your field, try librarian, Barnes & Noble, supermarket, or big box store. You only need part time to get the bennies in many cases.
4. Start the Roth ladder conversion. Convert IRA to Roth. Wait 5 years. Keep doing some every year to reduce the tax burden. Withdraw with no penalty because it counts as a contribution.

I like #3. I found a full time job in 2011 at age 49, and kept it for 7 years until I quit. We hired a Chemical Analyst aged 66 while I was there. Unless you are unskilled, I think you can scare up work as long as you are willing to look for 6-12 months or take a menial job. "I tried retirement, and I did not like it," plays surprisingly well, even if you don't really mean it.

#4 also works, but it may be hard to convert enough to remain eligible for ACA if you need it for health insurance.