401k bad for early retirement?

[stratozyck]

I apologize if this was elsewhere I looked and searched and did not find it. I also looked up 401k early withdrawals and found some complexities. I am trying to understand how this all works to get optimal strategy.

Question:
Currently I am on track for FI in my 50s. If things go really well, it could be late 40s to early 50s. By really well I mean, I get a huge raise in the next few years (possible as I am interviewing for a job like that but am not counting on it) or my wife gets a job (she is unemployed and we have a newborn - no rush). Even if things go "eh" I think FI is still likely at age 50-55 without major lifestyle changes.

I contribute the max matching for my 401k. But from what I understand, withdrawing before age 59.5 is problematic and has all sorts of rules to avoid a 10% penalty. Because of this, I have been additionally saving in non 401k accounts for both retirement and liquidity purposes (in case I lose my job or need a newer car for example). Its the same type of investments (Index funds, bond funds).

Is this a bad idea? Should I increase my 401k contribution more instead? From what I understand about capital gains taxes, I face a fairly low rate at retirement anyways even with a non IRA.

Thanks all I am motivated by those that have retired early. I told my father that I was aiming for retiring at 50 and he laughed it off as some sort of impossibility. But I have the spreadsheet to show that I am on the path for that!

[NoStacheOhio]

Read through this thread first: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

[WhoDey]

Not at all.  As NoStacheOhio posted there is a way to to withdraw before retirement age without penalty.  You only pay taxes on what you roll over to the roth.  Of course the only catch is that you need 5 years worth of living expenses saved up as you have to wait 5 years before you can withdraw the Roth rollover.

If you want to go further down the rabbit hole I implore you to check this out as well:  http://www.madfientist.com/roth-ira-horse-race/

[stratozyck]

Thanks, I read that article on the internet a few days ago and it seemed like a minefield. I wouldn't want to mess it up and end up paying a lot of taxes later on.

Either way, I still have a strong liquidity preference and want 2-3 years of after tax income saved up before I increase IRA contributions.

[Telecaster]

Remember also that the taxes on each dollar you contribute to your 401(k) are  deferred at your top marginal rate, whatever that is.  So contributing to the 401(k) allows you to save more money (overall) than if you were just making after tax savings. 

[stratozyck]

Yeah, I am weighing the liquidity preference in my head. I kindof see the taxable account as "for medium/long term savings but if things work out, for retirement."

Like if I need to replace my car I'd get cash from that. Or if I bought a house I'd potentially use that... I'm not sold on the IRA just yet (I do contribute max matching at work).