Withdraw all of IRA early to FIRE?

[divinvestor]

I have been bouncing around an idea in my head that involves withdrawing my entire IRA, which is about $80k, to accelerate my prospects and hopes of retiring early. I have a taxable brokerage account with about $27k that consists of two solid utility stocks that yield about 4% combined. I'm 35 years old, have a steady job in health care that provides a pension and 401k. I would combine the money from the IRA with my brokerage account to buy solid dividend growth stocks, reinvest dividends, and invest new capital along the way. The idea is to retire when I'm about 50 and live off the income provided by my investments. Obviously the dilemma is if I want to take that kind of a tax hit and penalty for withdrawing from the IRA early for the chance to FIRE at about age 50, or just leave that money alone in the IRA where it can grow tax free, but I would have to wait until I'm 60 to withdraw that money tax and penalty free. I'm in the process of converting my Traditional IRA to a Roth IRA, so any money I withdraw when I'm 60 and older will be tax free. Can anyone give me some guidance or suggestions? Thanks so much.

[matchewed]

Can't take the credit for it but....

http://www.nooooooooooooooo.com/

Read more about strategies for early withdrawal from retirement accounts without paying penalties. Look up SEPP and Roth Pipeline.

[divinvestor]

I appreciate your honest and straightforward answer matchewed :)  I have heard of SEPP/72(t) and researched it some, but honestly it sounds like a huge pain in the ass.

[matchewed]

So paying income tax + 10% penalty sounds good compared to learning how to do something... Your call.

[TomTX]

It's not a dilemma, it's a dumb choice.

Why do you have money in taxable anyway? If you want better access, you should be dumping it into a Roth. You can withdraw the contributions anytime.

When you want to retire, start your Roth pipeline conversions.  Pay very little tax.

[Frankies Girl]

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/
^written by a forum member here

It comes up several times a week. You can access IRAs/retirement accounts before 60. Roth pipeline is an easy and tax free way to do this.

It would be sheer foolishness to cash out an IRA completely and I can't think of a single reason this would make any sense at all. You'd pay taxes on ALL of it right then and as you're still earning income, that would be like getting (in your case) an $80K raise in one year since it would be lumped in with your current income. So say "HELLO" to a huge tax bill next year just for that - depending on how much you make, you could be paying out thousands of your IRA money just to cover that tax bill (and the IRS might just levy a penalty for going over $1k owed as well). And then there is the 10% early withdrawal penalty on top of that.


Do you just want to give away $2,000+ in taxes owed, and then an additional $8,000 (early withdrawal penalty) for moving your money out of an IRA? Because that's what you'll end up doing. Might as well set it on fire, since that is same result - you will automatically lose a large amount of money by doing this.

You probably aren't a stupid person right? So why do something so boneheaded?



Move the IRA someplace like Vanguard or Fidelity that has access to sweet low cost index funds, invest it and let it alone until you retire - early or otherwise - and then start a Roth pipeline.

http://www.madfientist.com/retire-even-earlier/
^start here for more on the Roth pipeline (and the Mad FIenstist has more info on his site as well)

And yes right now, once you've put into your 401k to the max, max the Roth, and then an HSA if you have one, and then back to max out the 401k and taxable is dead last in line.

[kpd905]

Don't do it.  Defer as much tax as possible while you are at a higher income.  Then look into using a Roth IRA conversion ladder.

Here is a good article with some nice charts: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

[Gin1984]

Also keep in mind you actually do need some money for when you hit 59.5 and beyond.

[divinvestor]

Thank you to those who have responded, I had a feeling I'd get a reaction like this. In my gut it seemed like a dumb idea but wanted to get others' opinions on it. And to answer your question Frankies Girl, no I don't consider myself stupid, I do have a degree in engineering and an MBA. I think the Roth IRA conversion ladder is something I'm going to seriously consider, that really got my wheels turning upstairs. So far I've converted about $16k into a Roth in 2014 and $10k in 2015 so far this year; there might be more. 

[Khan]

Thank you to those who have responded, I had a feeling I'd get a reaction like this. In my gut it seemed like a dumb idea but wanted to get others' opinions on it. And to answer your question Frankies Girl, no I don't consider myself stupid, I do have a degree in engineering and an MBA. I think the Roth IRA conversion ladder is something I'm going to seriously consider, that really got my wheels turning upstairs. So far I've converted about $16k into a Roth in 2014 and $10k in 2015 so far this year; there might be more.

Converted that much money?
You really need to read up on some MadFientist.
http://www.madfientist.com/retire-even-earlier/
http://www.madfientist.com/traditional-ira-vs-roth-ira/

Short of it: STOP. Contribute, pre-tax, to your accounts. Do -NOT- convert accounts while working. Also, as a side note, diversify that taxable account. 2 Utility stocks is not a diversified portfolio made. You can use ROTH conversions later, or SEPP(72(T)) later to access your tax deferred accounts, and use your current buffer of ROTH contributions/taxable account to survive the interim period.

[kpd905]

Thank you to those who have responded, I had a feeling I'd get a reaction like this. In my gut it seemed like a dumb idea but wanted to get others' opinions on it. And to answer your question Frankies Girl, no I don't consider myself stupid, I do have a degree in engineering and an MBA. I think the Roth IRA conversion ladder is something I'm going to seriously consider, that really got my wheels turning upstairs. So far I've converted about $16k into a Roth in 2014 and $10k in 2015 so far this year; there might be more.

You didn't mention your current income, but the idea is to start converting to Roth IRA after you are done working.  That way you convert some for free, some at 10%, and some at 15%.

Right now the conversions are at your marginal rate, which is probably 25% or higher.

[Indexer]

Thank you to those who have responded, I had a feeling I'd get a reaction like this. In my gut it seemed like a dumb idea but wanted to get others' opinions on it. And to answer your question Frankies Girl, no I don't consider myself stupid, I do have a degree in engineering and an MBA. I think the Roth IRA conversion ladder is something I'm going to seriously consider, that really got my wheels turning upstairs. So far I've converted about $16k into a Roth in 2014 and $10k in 2015 so far this year; there might be more.

Don't consider a Roth conversion pipeline.  Just plan on doing it!  With an engineering and MBA background this should be easy to follow.

Money in a tax deferred account + tax deduction grows faster than money in a taxable account.  Much faster.
Your are likely in a higher tax bracket now than you will be in retirement.  So you should NOT be doing roth conversions right now, and you should be adding as much as possible to tax deferred accounts.  Roth conversions are most beneficial when you are in a lower bracket.

Following those steps will help you build up a bigger nest egg.

Once you are retired you want enough in Roth contributions and taxable money to cover expenses for at least 5 years.  You might even want to do 6 years just in case an emergency comes up.  If you plan on spending 25k a year that is 150k.  Now you should have about 25 times your annual expenses in tax deferred accounts.  This would be 625k.  You have probably seen MMM throw that number around.  (Some people might even say 125k in taxable, and 500k in pre-tax = 625k total, but I like to side slightly on the side of caution).  This will cover your expenses and should still grow on top of that so you never run out.  Now year 1 of retirement you withdraw 25k from the taxable/roth contributions, and then you convert 25k from the pre tax accounts over to the roth.  Taxable income = 25k, you stay in a low tax bracket.  Repeat for 4 more years.  The reason you need 5 years worth of savings is because when you do a roth conversion you can't touch the money for 5 years without penalties.  By the end of year 5 you have for the most part exhausted the taxable money, but that roth conversion you did 5 years ago is available now.  Withdraw that, and then convert another 25k from the pre-tax to the roth.  Repeat until you are 59 1/2.  Then you can just withdraw from the pre-tax without penalties.  This is NOT complicated, and it will save you a boatload in taxes.

Now where it does start to get complicated is if you want to time it all so that at age 70 1/2 you have very little left in the pre-tax and everything is in the Roth.  You would want to do this to avoid large RMDs bumping you into a higher tax bracket, but once you master the roth conversion you will have a few decades to play with excel spreadsheets to figure out how you want to handle this.  ;)

[kpd905]

Now where it does start to get complicated is if you want to time it all so that at age 70 1/2 you have very little left in the pre-tax and everything is in the Roth.  You would want to do this to avoid large RMDs bumping you into a higher tax bracket, but once you master the roth conversion you will have a few decades to play with excel spreadsheets to figure out how you want to handle this.  ;)

Even more fun is when you are trying to keep your taxable income low enough to get some solid ACA subsidies, but also convert enough to avoid crazy RMDs.  But when you're retired you'll have all day to figure this stuff out. 

Take the tax savings now.