Author Topic: IRA early withdrawl  (Read 6910 times)

fiveoh

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IRA early withdrawl
« on: March 10, 2012, 07:21:13 AM »
I'm planning on early retirement(50ish) and was thinking about opening an Roth IRA for tax benefits.   Is there anyway to get around the 59.5 age limit for withdrawls or should I keep some money in a regular(taxable) investment account as well for the years before I turn 59.5?

Sunflower

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Re: IRA early withdrawl
« Reply #1 on: March 10, 2012, 08:02:45 AM »
With a Roth you can pull out any money that you added (principal) at any time with no penalty but you can't touch the interest until 59.5 except for a few special circumstances (buying your first home, some medical expenses).

I don't know as much about traditional IRAs but I'm pretty sure there's a way to start getting yearly payments with that early as well. But from my limited knowledge, its not as easy as pulling money from a Roth.

The chart here might help as well: https://personal.vanguard.com/us/whatweoffer/ira/factsheet

velocistar237

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Re: IRA early withdrawl
« Reply #2 on: March 10, 2012, 08:14:45 AM »
There are ways. There's something called the 72t rule. Also, for Roth IRAs, you can withdraw principal after it has been in the IRA for 5 years. I've heard of a strategy of rolling over money from tax-deferred accounts into your Roth IRA every year and then withdrawing it 5 years later. It takes a bit of planning. I haven't worked it out myself, so I'm not sure whether it's worth it.

Here's something from a quick search:
http://www.fool.com/money/allaboutiras/allaboutiras07.htm

sol

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Re: IRA early withdrawl
« Reply #3 on: March 10, 2012, 09:08:38 AM »
I'm planning on doing the five year 401k-Roth rollover technique.

Any money you roll over into the Roth has to sit there for five years before it can be withdrawn, so the basic plan looks like this:

1.  Quit working, and so put yourself in a lower tax bracket.
2.  Every year, roll over the amount of income you think you will need in five years.  You will have to pay taxes on this rollover amount, but with personal exemptions and your new lower bracket, this amounts to paying a very low tax rate on money that you have invested tax-free in your 401k.
3.  After five years, you have built this little pipeline of annual rollovers and can withdraw the amount you have rolled over 5 years ago without penalty and tax free. 

Together, these steps allow you to get money out of your 401k without paying any significant taxes, ever.

The downside is that you need living expenses for five years to make this work.  Part of that can come from your Roth IRA principle contributions, but unless your living expenses are very low and you have been contributing to the Roth for a very long time, they are unlikely to wholly support you for five years.

The other alternative, if you have more 401k money, is Rule 72(t) distributions.  These are annual penalty-free withdrawals from your 401k before age 59.5, but they are calculated based on your life expectancy at the time of withdrawal.  There are three different accounting methods, but even the most front-loaded is unlikely to provide full living expenses unless you are already very near retirement age.  For someone retiring in their 30s or early 40s, it is not enough unless you have a HUGE stash.

So in my case, I am keeping some money in taxable accounts to help bridge the five year gap between quitting work and making tax free and penalty free 401k withdrawals through my Roth IRA.

Remember that there are certain asset classes that are not taxable, such as municipal bonds, and if you're going to own them somewhere in your portfolio it only makes sense to hold them in your taxable accounts.
« Last Edit: March 10, 2012, 09:10:17 AM by sol »

arebelspy

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Re: IRA early withdrawl
« Reply #4 on: March 10, 2012, 06:42:32 PM »
To confirm what the others have said, with the Roth you can take principal out penalty free.

For the traditional IRA, search for "72t" or "equal periodic payments" - you can withdraw from your IRA in equal yearly payments, but you can't withdraw more or less in a given year, and you can't stop once you start it.
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fiveoh

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Re: IRA early withdrawl
« Reply #5 on: March 10, 2012, 07:01:48 PM »
If you take early withdrawl on the Roth even though its penalty free you still have to pay taxes, correct?

arebelspy

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Re: IRA early withdrawl
« Reply #6 on: March 10, 2012, 07:10:19 PM »
If you take early withdrawl on the Roth even though its penalty free you still have to pay taxes, correct?

No.  No taxes ever on a Roth.  It's a post-tax retirement vehicle.

Whether you withdraw at age 29 or 59.5.
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sol

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Re: IRA early withdrawl
« Reply #7 on: March 10, 2012, 07:55:52 PM »
search for "72t" or "equal periodic payments" - you can withdraw from your IRA in equal yearly payments, but you can't withdraw more or less in a given year, and you can't stop once you start it.

That's not quite true; you can adjust the 72t withdrawals when you turn 59.5. 

So in my case, since I have a pension and expect to draw some from social security, I intend to draw my 401k down to near zero by age 59.5 (by 72t and Roth rollovers), and then at that point adjust them to tiny payments to soak up whatever is left.

If you take early withdrawl on the Roth even though its penalty free you still have to pay taxes, correct?


As long as you're only withdrawing what you contributed (and not earnings), Roth money comes out without penalty or taxes, just like a savings account.  For this reason, I often advocate that people consider their Roth as part of their emergency fund, and thus encourage that they keep their checking account balances much lower than they otherwise would.  Checking accounts are for short term needs only, like as many days as it would take you to get your Roth money back if you had a real emergency.

With that said, I'm still finding that I like the Roth less and less.  I'm paying a stupidly high tax rate right now on my relatively high income, and putting that money into the Roth means paying my current marginal rate on it.  For someone who is planning to retire early and live off a lower income than they have now, the Roth isn't so sweet of a deal.

Except for estate planning purposes.  If you're planning on leaving money to your heirs, the Roth is the way to do it.  For this reason, I intend for my Roth to be the very last source of my savings that I draw down in my old age.
 

tuixiuren

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Re: IRA early withdrawl
« Reply #8 on: March 24, 2012, 07:05:37 PM »
I wrote about rolling Roth conversions on my blog also.  Sol has it right. 

http://back2free.blogspot.com/2012/01/everypeople-want-my-money-taxman.html

« Last Edit: March 24, 2012, 10:54:24 PM by tuixiuren »

MacGyverIt

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Re: IRA early withdrawl
« Reply #9 on: March 25, 2012, 07:47:47 AM »
With that said, I'm still finding that I like the Roth less and less.  I'm paying a stupidly high tax rate right now on my relatively high income, and putting that money into the Roth means paying my current marginal rate on it.  For someone who is planning to retire early and live off a lower income than they have now, the Roth isn't so sweet of a deal.
Sol, I'm also feeling a lot less enamored of the Roth for ER purposes.

Recently, I met with my financial advisor about ER goals and he recommended I focus less on the Roth and more on my investment accounts to build revenue generation btwn ER and when I have access to my 401k. Hadn't really thought about it until that meeting - I was so focused on checking the boxes: max out 401k? Check! IRA? Check! Investments? Check! But that process works for conventional retirement, not ER.

Now I'm debating how much if at all I want to pursue the Roth, or put all that money towards investments I can access/live off of at any time. (I'm at least five years out from ER, btw.)

sol

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Re: IRA early withdrawl
« Reply #10 on: March 25, 2012, 08:56:09 AM »
Now I'm debating how much if at all I want to pursue the Roth, or put all that money towards investments I can access/live off of at any time. (I'm at least five years out from ER, btw.)

I just made a little spreadsheet with my annual expense per year, adjusted for cost of living, and my savings to each account for each year, adjusted for contributions and returns.  Each account has different withdrawal restrictions, so I'm trying to balance everything such that my rising expenses can be met every year by some combination of all of the accounts.

It wasn't very hard to do, and it gave me a much better idea of how much money I need to have in my 401k vs my IRA vs my taxable accounts before I can retire.  I agree that having it all in the 401k would make early retirement a bit difficult for those first few years.

arebelspy

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Re: IRA early withdrawl
« Reply #11 on: March 25, 2012, 09:16:40 AM »

Now I'm debating how much if at all I want to pursue the Roth, or put all that money towards investments I can access/live off of at any time. (I'm at least five years out from ER, btw.)

Eh, the limit on a Roth is 5k/yr.  Over the next 5 years, that's 25K you can contribute to it.  If you're planning on ERing and having your investments support you, that's a tiny part of your portfolio, and one you can leave for a long time.

Not contributing to a Roth because you want access earlier is silly due to those low contribution limits (especially since you can withdraw that 25k principal any time).

Even maxing out your Roth for the next 5 years should still leave the vast majority of your investments accessible.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.