Author Topic: Withdrawing Early - Avoiding Taxes / Penalties  (Read 680 times)

wfhark

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Withdrawing Early - Avoiding Taxes / Penalties
« on: May 22, 2019, 05:06:47 AM »
Howdy mighty Mustachians!

I'd like to understand, with specific examples, what accounts can be used to withdraw from prior to 59.5 years of age?

If the goal was not to retire early, but take a lump sum of $500k, and put it in an account and draw on the dividends as a "part-time" income (let's say), what would that look like specifically? What account would be needed, how much taxes would need to be paid, how would that affect an individuals current tax situation (based on full-time income), etc.? For this question, let's say that $500k was not in a retirement (401k, roth, or std. IRA account).

Thanks in advance!!!

reeshau

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #1 on: May 22, 2019, 06:07:47 AM »
I'd like to understand, with specific examples, what accounts can be used to withdraw from prior to 59.5 years of age?

...

For this question, let's say that $500k was not in a retirement (401k, roth, or std. IRA account).

Thanks in advance!!!

If the money is not in a retirement account, then age has nothing to do with it.  59.5 is a factor only when considering those accounts.

If you had $500k in cash, there isn't any income from its use.  If you have it in investments, then you could pay long-term capital gains or short-term regular income, depending on the investment and whether or not you have held it for over a year.

wfhark

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #2 on: May 22, 2019, 06:40:36 AM »


If the money is not in a retirement account, then age has nothing to do with it.  59.5 is a factor only when considering those accounts.

If you had $500k in cash, there isn't any income from its use.  If you have it in investments, then you could pay long-term capital gains or short-term regular income, depending on the investment and whether or not you have held it for over a year.

So if I understand your response, everyone who has retired early and is "living off the 4%", or living off dividends, has their lump sum in a cash account invested in something...and is paying capital gains tax of some kind?


Boofinator

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #3 on: May 22, 2019, 07:20:20 AM »
Do a search for SEPP 72(t) (https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments) and Roth conversion ladder. These are the two primary methods used to perform early withdrawals without "penalty". (I use penalty in quotes, because even with this penalty, it is usually still worth it as compared to using a taxable account.)

reeshau

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #4 on: May 22, 2019, 07:36:30 AM »
Many people are also using the "mega backdoor Roth" conversion method from a traditional IRA or 401k.  This requires 5 years' advanced planning (because there is a 5 year holding period before "contributions" (converted tIRA) are accessible) and a modest enough lifestyle to keep to lower income tax brackets.

https://www.madfientist.com/after-tax-contributions/

Sibley

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #5 on: May 22, 2019, 07:43:36 AM »


If the money is not in a retirement account, then age has nothing to do with it.  59.5 is a factor only when considering those accounts.

If you had $500k in cash, there isn't any income from its use.  If you have it in investments, then you could pay long-term capital gains or short-term regular income, depending on the investment and whether or not you have held it for over a year.

So if I understand your response, everyone who has retired early and is "living off the 4%", or living off dividends, has their lump sum in a cash account invested in something...and is paying capital gains tax of some kind?

Everyone? Nope. The funding methods for FIRE are many and diverse. But some, sure. Investment accounts of some sort, whether tax advantaged or not, are part of the mix for a lot of them I'm sure.

One

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #6 on: May 22, 2019, 07:12:09 PM »


If the money is not in a retirement account, then age has nothing to do with it.  59.5 is a factor only when considering those accounts.

If you had $500k in cash, there isn't any income from its use.  If you have it in investments, then you could pay long-term capital gains or short-term regular income, depending on the investment and whether or not you have held it for over a year.

So if I understand your response, everyone who has retired early and is "living off the 4%", or living off dividends, has their lump sum in a cash account invested in something...and is paying capital gains tax of some kind?

If you're retired early you will get dividends/interest. You will also be pulling principle.  Won't have to pay much tax. Check your tax bracket and run the numbers.

Mazzinator

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terran

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Re: Withdrawing Early - Avoiding Taxes / Penalties
« Reply #8 on: June 06, 2019, 01:14:29 PM »
Many people are also using the "mega backdoor Roth" conversion method from a traditional IRA or 401k.  This requires 5 years' advanced planning (because there is a 5 year holding period before "contributions" (converted tIRA) are accessible) and a modest enough lifestyle to keep to lower income tax brackets.

https://www.madfientist.com/after-tax-contributions/

The mega backdoor Roth (a good explanation of which you you have linked) is not the same this as a Roth conversion ladder: https://www.madfientist.com/how-to-access-retirement-funds-early/