What time of year to retire and tax/401k implications?

[AccidentalMiser]

I've been thinking about this topic for a while and I would like some feedback on my plan, if you please.

I turn 51 this year.  We have just enough saved right now that I am confident that I could stop working now and be OK.  However, since I am careful and generally risk-averse, I have decided to retire in 2022.  That's the year I turn 55 and won't have to pay a penalty on 401k withdrawals.

So, originally, I thought that January 2 would be a good time to actually retire.  However, I can carry over 240 hours vacation time from the previous year so I thought I'd carry over the max and take six weeks off then come back and retire.  That puts me at mid-February.  It's dumb to retire in the middle of the month so I was thinking first of March.

However, if I work one more month, I'll get six months bonus instead of three (it's calculated out quarterly, for every full quarter of the FY you work, you get a quarter of the annual bonus.)  So, I've landed on April 1, which will give me a half-year's bonus (about 25k).

So, then I have to decide what to do about my final year's 401k contribution.  I'll gross roughly 40k from January through March.  Then I'll have the 25k on top of that.  That will make my tax picture very different and I am reluctant to put money in my tax-deferred accounts if I'm expecting to have very little in tax. 

Because of that, I'm planning to put as much in the Roth 401k as possible to reach my contribution limit within the first three months of the year and jack up my W-4 deductions to minimize my withholding (they automatically withhold about 25% of the bonus anyway).  I won't need the money to live on by that time but I want to make sure I've considered all the angles.

Thanks for your opinions!  Please feel free to request any info I've omitted.

[LightStache]

Sounds awful close to OMY even though you're still four years out ;). Your plan is sound -- good luck!

[StetsTerhune]

It sounds like you have most of the factors laid out. When I quit, I made a spreadsheet of every work day for the year, and plugged in all the factors (bonuses, marginal tax, additional 401k contributions, 1st of the month you get benefits for the month,etc.) I used this to figure out my true marginal take home value for every work day and figure out the optimal day to quit. I think for me it was April 1st.

Slightly off topic, I find it very hard to believe given these numbers that you don't have plenty outside of your 401k to make it till 2022, in addition to the fact that it's relatively trivial to avoid early withdrawal penalties in ER. If you want to work 4 more years, or feel like you need the money, fine, but don't hide behind the excuse of 401k penalties.

[Dragonswan]

Will your employer allow you to take six weeks off at once?  Regardless, I would just work those 3 months, accrue even more time off and then let them pay you for all that vacation time.  So 240 from the previous year + ~40-48 for the current year at your salary is a nice payout.  Otherwise, your plan sounds good.

[Scandium]

Slightly off topic, I find it very hard to believe given these numbers that you don't have plenty outside of your 401k to make it till 2022, in addition to the fact that it's relatively trivial to avoid early withdrawal penalties in ER. If you want to work 4 more years, or feel like you need the money, fine, but don't hide behind the excuse of 401k penalties.

That's what I was thinking. With all that saved up, and big bonuses, it's hard to believe OP doesn't have 3 years of expenses saved somewhere. No idea how much they spend, but taking say $150k to live off those 3 years and just retire right now sounds much better!

If the money isn't there then of course that don't work. The plan sounds fine otherwise

[TomTX]

So, there are threads on the MMM forum describing different ways to get money out of a 401k before 55/59.5 without penalty.

If you are really at FI from a dollar perspective - go read them.