Can you retire early using 401k?

[InSearchofBeauty]

Brand new, so please be kind ;-)

I'm 49 and considering early retirement. I've laid out budgets and have a pretty accurate assessment of required living expensies, I think. Half of my income will come from rental property. But the other half would have to come from my 401K retirement plan from my current employer.

Given my age, is this wise, and is this feasible (without aggregious penalties)? Again, I'm sure this is basic, but I welcome advice, insights, and pointers.

Thanks in advance.

InSearchofBeauty

 

[Nords]

Welcome to the board, Beauty.

There are a number of ways to extract money from your 401(k) after you stop working but before you reach the minimum withdrawal age. Or you could roll that 401(k) over to an IRA and withdraw it under those early-withdrawal rules. Or you could roll over to an IRA, convert that to a Roth IRA, and entertain yourself with yet a third set of early-withdrawal rules.

There are many ways to do it and they're all intended for different situations. Fairmark.com has a number of good summaries of 401(k) withdrawal methods, or you could ask a more specific question. It's all feasible and generally wise!

 

[InSearchofBeauty]

Thanks for the pointer. From my quick perusal of that site, the IRS site, and form 590, I guess we are talking about SEPPs. Not wanting to ever be accused of being a tax guy, let me ask a few possibly dumb questions (in all cases I am trying to avoid the 10% early withdrawal penalty):

1. Does the SEPP have to be the same $ amount, or can it be a fixed percentage of the portfolio?

2. If I guess wrong (too low let's say), and I take another SEPP from the same portfolio to make up the difference in what I now realize I need to live?

3. Am I correct in thinking that I only need to "get this right" until age 59.5, and after that I can do with it as I please?

4. This would seem (to me) to be a common issue for retire early wannabees. Anyone have pointers to the classic sites or posts that deal with this topic?

Thanks in advance, I appreciate any and all suggestions.

InSearchofBeauty

 

[Sam]

1. Same amount (unless using the Life Expectancy method)

2. I think you are allowed to make one correction, don't remember all the details.

3. After 59.5 you're free to do what you want.

4. Yes, it's a common question. Try searching for SEPP, 72(t), 72T

Good luck and congratulations on getting there.

Edit: Corrected 1.

 

[InSearchofBeauty]

That search suggestions was great -- top hit returned this gem wich answered all of my questions:

http://www.retireearlyhomepage.com/wdraw59.html

One point that I took from this is that if I use life expectancy method, the $$ amount will be readjusted each year based on the new portfolio value and my new life expectancy. Sounds good to me, since that is likely to increase the distribution, and I was worried about locking in an amount too low if inflation picks up.

Thanks again to all. I'm sure I will have more questions on many other topics.

InSearchofBeauty

 

[Sam]

One point that I took from this is that if I use life expectancy method, the $$ amount will be readjusted each year based on the new portfolio value and my new life expectancy.

Oops! That's new to me. I always thought that the amount is fixed (not even inflation adjusted).

Can anyone shed some light on this?

Edit: Never mind.

Yes, the amount is adjusted each year for the life expectancy method. I did know about it, but totally brushed it aside because the amount that can be withdrew is way too small.

 

[AzDreamer]

This is something I saved from an earlier thread.

I also visit many retirement-like message boards, and, I can’t really remember where I saw this, but some poster said that he/she was receiving PENALTY-FREE DISTRIBUTIONS FROM HIS 401K because he had reached the age of 55. So, I went to the IRS website on 401Ks and found that the IRS has a few EXCEPTIONS TO THE 10% PENALTY. One exception was that if YOU HAVE A SEPARATION OF SERVICE FROM THE EMPLOYER WHO IS SPONSORING YOUR 401K PLAN, AND YOU ARE 55 OR MORE, YOU CAN BE EXCLUDED FROM INCURRING THE 10% PENALTY.

 

[InSearchofBeauty]

I read that also, but noted the caveat that you had to separate at 55 (or older). Had you separated at 54, you could not use this method. Here's the reference I found:

"Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP."

 

[Khan]

1. Same amount (unless using the Life Expectancy method)

2. I think you are allowed to make one correction, don't remember all the details.

3. After 59.5 you're free to do what you want.

4. Yes, it's a common question. Try searching for SEPP, 72(t), 72T

Good luck and congratulations on getting there.

Edit: Corrected 1.

After 59.5 or 5 years, whichever comes LAST.

 

[martyb]

When I retire at age 55 (49 now) I'll be able to begin withdrawals from my TSP (government's version of 401k) without any penalties. My current plan, though is to try not to start withdrawing from that account for another year or two after retirement. Hopefully, my pension & DW's w*rk income will hold us over without needing to tap the savings for a little while.

 

[CyclingInvestor]

I retired a few months ago at 48. About 90% of my investment $$ are
in my IRAs, so I have started 72t withdrawals from my largest IRA. I am
using the life expectancy method. In addition to the retire-early-home-page
already mentioned, I have found

http://www.72t.net/

to be very useful. The most important thing to remember - once you start
taking 72t distributions, take EXACTLY the right amount out each year
(easy to calculate), and never add/withdraw any other $$ - the penalties
are very high.