Author Topic: sorry- newbie question  (Read 2542 times)

lavagirl

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sorry- newbie question
« on: January 19, 2015, 09:30:03 AM »
Hi.  I'm new here and have probably a stupid question. In order to retire early do I need enough money for fire in accounts I can access before age 62? I see posts where people have a good portio of their net worth in 401 k or tsp accounts. But you can't access those accounts if you retire early.  Is there a certain amount to keep in say index funds and a certain amount in 401k? Can someone please clarify?

nawhite

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Re: sorry- newbie question
« Reply #1 on: January 19, 2015, 09:53:15 AM »
Short answer: There are 2 ways to get money out of 401ks and IRAs penalty free before 59.5 (or 55 if you quit at 55).
1) 72(t) withdrawls also know as Substantially Equivalent Periodic Payments (SEPP): you say "I want to withdraw the same amount every year from my 401k and I promise I will never change the amount I'm withdrawing." The government lets you do this without penalty, just with the taxes you would have to pay normally at retirement.
2) a "Roth Conversion Ladder": take all of your 401k and do a "rollover" into a traditional IRA when you retire (you can do this any time you change jobs). Then every year take one year's living expenses and do an IRA "conversion" from the traditional to a Roth. You will pay income taxes on that amount but since you are retired like a mustachian and have low income, the taxes will also be low. 5 years later, you can take the amount you did for that "conversion" out of your Roth account tax and penalty free (you can always take "contributions" out of a Roth account tax and penalty free). Repeat every year. This makes a pipeline with 5-ish years of contributions in your Roth account which live there until they can mature for 5 years at which point the "conversions" get counted as "contributions."

Best description of how to do this that I know of is here: http://www.madfientist.com/retire-even-earlier/

MMM also had an article about this, but I don't agree with his final answer that you can have too much in a 401k b/c you can get it out tax free using the madfientist's ideas: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

I will admit that both of these posts were written pre-ACA and that the ACA has put one hiccup in these plans if you plan to take healthcare subsidies while you are priming the "Roth Conversion Ladder." Priming the roth conversion ladder requires temporarily increasing your Gross Income for 5 years and higher gross income means less subsidy. Your numbers may vary but for me it works out as a 13% tax while I'm priming the ladder.

nereo

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Re: sorry- newbie question
« Reply #2 on: January 19, 2015, 10:00:26 AM »
Hi.  I'm new here and have probably a stupid question. In order to retire early do I need enough money for fire in accounts I can access before age 62? I see posts where people have a good portio of their net worth in 401 k or tsp accounts. But you can't access those accounts if you retire early.[FALSE!]  Is there a certain amount to keep in say index funds and a certain amount in 401k? Can someone please clarify?
nawhite has provided a good synopsis.  Just realize that you CAN access those accounts if you retire early using several different methods.  Also, you can ALWAYS access those accounts if you are willing to pay the taxes and fees.  That's not ideal but it's certainly an option.
Finally, most people here will max out there tax-advantaged accounts and then still save some money in index funds.  This may or may not be possible for you, but hopefully at some point during your working career you will max out your IRA/401/403/HSA options and will still save extra money.

Frankies Girl

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Re: sorry- newbie question
« Reply #3 on: January 19, 2015, 10:44:10 AM »
It's been asked so much, they made it a sticky in the FAQs:

http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/

Check the whole thing, but specific reference is in catccc's post.
:)
« Last Edit: January 19, 2015, 10:47:41 AM by Frankies Girl »

lavagirl

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Re: sorry- newbie question
« Reply #4 on: January 19, 2015, 11:19:46 AM »
Thanks for explaining!