Author Topic: 401K and Early Retirement? How?  (Read 4455 times)

Growing the Stash

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401K and Early Retirement? How?
« on: February 22, 2015, 06:07:33 AM »
Hello all,

     Common advice on MMM, and other sources, is to max out tax-advantaged accounts before putting money elsewhere, such as brokerage accounts. This means $17,500 in 401K plus $5,500 in a Roth IRA for a total of $23,000 in savings. This doesn't even include adding to an HSA as I've been reading about as another investment vehicle. Since the Roth IRA is non-deductible tax-wise, you are actually adding more than $5,500 (since its not gross pay that is being added and so taxes are paid on those contributions). For the sake of simplicity, lets say that someone is earning $50,000 a year. By contributing the maximum to both the 401K and Roth IRA, this person is effectively saving 50% of their income.

     So to my question: How is one supposed to retire early, when their savings is locked up in accounts that that aren't accessible until the account owner is 59.5 (without incurring penalties)? I've read a couple of threads on the 'backdoor IRA,' but the amount of money coming out of this doesn't seem as though it is enough to live. What am I missing here?


boarder42

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Re: 401K and Early Retirement? How?
« Reply #1 on: February 22, 2015, 06:10:10 AM »
This question is asked almost daily a simple search will answer your question. But to make it simple look up sepp 72t. And the more preferred Roth IRA conversion ladder both of these get around the early withdrawal penalty.

Growing the Stash

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Re: 401K and Early Retirement? How?
« Reply #2 on: February 22, 2015, 06:19:33 AM »
Hello,

     I have read about the 72t, but this represents about $3,000 per year (I believe it was referenced as 'grocery money' here on MMM). This doesn't seem to really cut it. On top of this, the conversion seems to have a 5 year period before the money is even accessible (unless you start BEFORE retirement which would put you in a higher tax bracket).

dKonstruct

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Re: 401K and Early Retirement? How?
« Reply #3 on: February 22, 2015, 06:58:50 AM »
Hello,

     I have read about the 72t, but this represents about $3,000 per year (I believe it was referenced as 'grocery money' here on MMM). This doesn't seem to really cut it. On top of this, the conversion seems to have a 5 year period before the money is even accessible (unless you start BEFORE retirement which would put you in a higher tax bracket).

Have you read this article at Go Curry Cracker: http://www.gocurrycracker.com/never-pay-taxes-again/



iamadummy

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Re: 401K and Early Retirement? How?
« Reply #4 on: February 22, 2015, 07:26:18 AM »
early withdraw from 401k

beltim

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Re: 401K and Early Retirement? How?
« Reply #5 on: February 22, 2015, 08:12:54 AM »
Hello,

     I have read about the 72t, but this represents about $3,000 per year (I believe it was referenced as 'grocery money' here on MMM). This doesn't seem to really cut it. On top of this, the conversion seems to have a 5 year period before the money is even accessible (unless you start BEFORE retirement which would put you in a higher tax bracket).

72t withdrawals allow for >3.5% of the invested sum to be withdrawn each year.   That would only represent $3,000 per year if your retirement  savings were well under $100k.  Bankrate has a pretty good 72t calculator where you can see you withdrawal rate based on your age, marital status and current interest rates.

Also, the 5 year period you're talking about is for a completely different strategy. The 72t can be accessed immediately.

5pak

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Re: 401K and Early Retirement? How?
« Reply #6 on: February 22, 2015, 08:34:53 AM »
This is just me, but I don't plan to access my IRA before 59 years anyway. The rest of my funds will come from other investments. The IRA I'll put into until it reaches a point where it grows on its own and so won't need any more funding. My state pension plan is out of my hands, so that's another source of income, meaning I honestly won't need as big an IRA (assuming I choose to continue working with the state).

So, that's another option: fund your IRA until compound interest will carry it forward on its own, then put that money to use elsewhere. Once you hit 59, the IRA opens up and can be used to supplement your other funds.

boarder42

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Re: 401K and Early Retirement? How?
« Reply #7 on: February 23, 2015, 05:45:48 AM »
You can retire earlier and faster if you put your money into tax deferred accounts.  vs other investments that are taxable.

http://www.madfientist.com/retire-even-earlier/

therefore using a method described above 72t (not preferred as once the distributions start they dont stop.) or Roth Ladder 100% under your own control.

humblefi

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Re: 401K and Early Retirement? How?
« Reply #8 on: February 23, 2015, 06:59:59 AM »
You have got some wonderful advice already. Let me add a small example here.

I have split my retirement planning into two phases:

+ Early retirement:
   ++ ages 50-70
   ++ Funded by passive income streams
+ Real retirement:
   ++ ages 70+
   ++ Funded by IRA/401K.

You can play with the ages as appropriate in your case. With this model, I am giving my 401K/IRA more time to compound while funding my early retirement through passive income streams. If I manage it correctly, the passive income streams will generate qualified dividends and/or long term gains like mentioned in the gocurrycracker article i.e. appx $70000 of your investment income is tax free for couples. More info on my design is at http://humblefi.com/2015/01/03/how-to-fund-my-retirement/.

Hope that helps.

Avidconsumer

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Re: 401K and Early Retirement? How?
« Reply #9 on: February 23, 2015, 07:35:00 AM »
Buy 10 rental properties at 100k a pop with passive income of $250 each a month.
Claim asset depreciation of $3,700 a year as well as mortgage interest costs.
No Tax!