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Learning, Sharing, and Teaching => Investor Alley => Topic started by: FIBy30 on March 18, 2013, 12:15:52 AM

Title: 401K for Early Retirement?!
Post by: FIBy30 on March 18, 2013, 12:15:52 AM
I am all for early retirement but is putting the IRS maximum in the 401k the solution?  Isn't there problems because the 401k can't be withdrawn until 59.5?  Is MMM cracking into this money penalty free somehow that I don't know about?  Or is he living off of other funds? A big part of my plan to FI is to owner occupy multi families every year to build my rental portfolio.   
Title: Re: 401K for Early Retirement?!
Post by: Mike on March 18, 2013, 02:12:39 AM
You can roll it into an IRA and convert it to a Roth (which means paying income tax on the amount converted).  Five years later, you can withdraw that converted money tax and penalty free.  The other way of accessing it is via the 72(t) rule which requires a calculation using IRS tables to determine how much you can withdraw without penalty.  That one is complicated though as you have to do it over a period of years, plus you won't get much money that way due to currently low interest rates, and if you screw up the calculation at any point and withdraw too much money, the IRS will hit you with penalties for every year of disbursements (meaning if you go this route, a tax professional is a good idea).

Of course, if your spending level is low, you could just take a withdrawal and pay the tax + 10% penalty on it.  If you're in the 10% bracket in retirement, you'd still come out ahead if your marginal rate in your working career is 25%; if you're in the 15% bracket in retirement, it's a push.
Title: Re: 401K for Early Retirement?!
Post by: arebelspy on March 18, 2013, 07:10:35 AM
MMM's article on the topic of 401k investing: