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Old 05-07-2008, 10:50 AM   #1
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Pardon the Stupid Question

Forgive the simplicity, I've searched thru the FAQ's and didnt see anything along the lines of this...

For someone to retire pre-55 (or 59 1/2), one would have to be supported strictly from their taxable accounts. Is this an accurate statement? The assumption is to avoid penalties drawing from a tax-deferred account (401k, IRA, etc).

Can anyone shed some light on this?

Also, just a note to the mods, maybe I'm just not good at this, but the search function doesnt allow you to enter an age. For instance, I'd love to search for "Retire before 55" or "Retire 35" but the search engine omits the ages. Maybe there are some tricks people can share?
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Old 05-07-2008, 10:57 AM   #2
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You can pull money penalty free from your IRA(s). It's called a 72t or SEPP. You can google it.
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Old 05-07-2008, 11:07 AM   #3
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madatrub,

Welcome to the boards!

The statement is not accurate. There are two exceptions.

The first is a provision in the tax code for individuals to withdraw money early penalty-free (but not tax free) from certain tax-advantaged accounts (including traditional IRA's, and 401(k)'s can be rolled into traditional IRA's). To do so, you must meet certain requirements of the law, but the basic idea is that the withdrawals must form a series of substantially equal periodic payments. Search terms that will help you find information on this subject are "SEPP" and "72(t)". The latter is the section of the tax code where the law is found; it is analogous to the more well known 401(k) or 403(b).

The other exception is that the law allows penalty free withdrawals from 401(k) plans as long as you leave that employer in the year in which you turn 55. These withdrawals do not have to be SEPPs but there may be restrictions of various types applied by the plan administrator.

As to your search question, I have no idea. A workaround, though, is to use Google with the "site:" functionality. Try entering something like "retire 35 site:early-retirement.org" and see if that gives you what you want.

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Old 05-07-2008, 11:07 AM   #4
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Originally Posted by madatrub View Post
Forgive the simplicity, I've searched thru the FAQ's and didnt see anything along the lines of this...

For someone to retire pre-55 (or 59 1/2), one would have to be supported strictly from their taxable accounts. Is this an accurate statement? The assumption is to avoid penalties drawing from a tax-deferred account (401k, IRA, etc).
As noted, there is the 72T option, but also some 457 plans allow withdrawal at 55 without penalty upon termination of employment. Depending on the individual circumstances, there can be workarounds. However, in some cases, yes, you need to live off of income from nonqualified accounts.
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Old 05-07-2008, 11:16 AM   #5
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I explored doing a 72(t) when I retired at 45 and found a great resource here:

Welcome to 72t on the Net

It has been a couple of years since I spent any time looking at it, but I found the information to be accurate and well-explained. The site is regularly updated with new info.

I chose not to do 72(t) distributions, but that was only because it turned out to not be a necessity in my case. It's not overly complicated to do, and once you have learned the ins and outs you will probably find that it's simple to do. But there are mistakes to avoid (the website discusses those in detail) if you don't want to pay a lot of money in penalties to the IRS.
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Old 05-07-2008, 11:19 AM   #6
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Originally Posted by madatrub View Post

Also, just a note to the mods, maybe I'm just not good at this, but the search function doesnt allow you to enter an age. For instance, I'd love to search for "Retire before 55" or "Retire 35" but the search engine omits the ages. Maybe there are some tricks people can share?
Unfortunately, the search function does not work very well on vBulletin boards. The problem with the ages I believe has to do with the problem of searching two characters. You also cannot search two characters like "MD" or "in" or "at," etc.

The easiest way to search is to use Google advanced search. It allows you to restrict the search to a particular site, here it would be early-retirement.org.
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Old 05-07-2008, 11:23 AM   #7
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I do see that there is no FAQ on the issue of early distributions from retirement plans. Unless someone else volunteers, I will work on putting one together. It would cover 72t distributions from IRAs, distributions from ROTH IRAs, and circumstances where early distributions can be taken from qualified plans like 401ks, 403bs and 457 plans.
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Old 05-07-2008, 11:32 AM   #8
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Thanks guys for the quick feedback and search engine tips!

Leon, nice to see that you pulled off an early retirement at the age I'm currently targetting. Although, not sure I want to call it that.. I just want to shed the shackles of corporate america while being FI.
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Old 05-07-2008, 11:38 AM   #9
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Retire Early: Can I withdraw money from my IRA before age 59 ?

There looks to already be a page on this on the other board....
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Old 05-07-2008, 11:40 AM   #10
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You can also withdraw contributions from a Roth penalty free at any time. Also look at 72(t), taxable accounts, annuities and other investment opportunities.
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Old 05-07-2008, 11:53 AM   #11
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Leon, nice to see that you pulled off an early retirement at the age I'm currently targetting. Although, not sure I want to call it that.. I just want to shed the shackles of corporate america while being FI.
I know what you mean. I've recently stopped telling people that I'm retired, or not working, and now I just say that "I'm self-employed". It keeps them from saying "You're too young!", or asking "What do you do all day?"
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Old 05-07-2008, 12:12 PM   #12
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Thanks for the additional comments.

To follow up with another question, our income is currently above the ability to invest in a Roth. We both max our 401k contributions. We managed to invest in a Roth for 2 years before we capped out with modified AGI.

What options do I have? At this point, what are the real differences between opening another IRA vs. after-tax contributions to my current 401k? Any opinions on either way, other opprotunities?
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Old 05-07-2008, 01:57 PM   #13
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I would use some tax defferred IRAs even if money is going in without a deduction. I would also create a taxable account too.

The IRA could be converted to a Roth later- in 2010 I believe the income cap for Roth conversions increases or goes away. So sock money away now with intent to convert it later.

At same time diversify the account types to use taxable accounts and tax efficient investments in those accounts. Muni bonds, growth funds and commodities come to mind.
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Old 05-07-2008, 03:22 PM   #14
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I use vanguard for my taxable account, but if you could, please expand on what you mean by "tax efficient investments"? I feel that my current allocation in my taxable account may not be optimal.
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Old 05-07-2008, 10:29 PM   #15
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I use vanguard for my taxable account, but if you could, please expand on what you mean by "tax efficient investments"? I feel that my current allocation in my taxable account may not be optimal.
Typically, index funds are more "tax efficient" than actively-managed funds, since actively managed funds (on average) have more buying and selling performed than the index funds. When the fund sells a position, they have to distribute out the net gains each year - which you pay taxes on. If they didn't distribute out those gains, then your money would compound/grow for longer periods of time before taking out money for taxes, and you'd end up with a larger account balance. Also, you pay a lower tax rate for long-term capital gains versus interest and some dividends - so a MF that holds bonds and some dividend-paying stocks will cause you to pay more in taxes than the same distributions from a fund that realizes long-term capital gains.

There are some actively-managed funds which specifically aim to reduce taxable distributions by picking stocks that they plan on holding for extended periods of time and/or pay out little/no dividends and hold few/no bonds. Vanguard has several, and they all start with the title "Tax-Managed".

One other thing to remember: just as diversification is key in investing, the same holds true with taxes. It's not necessarily a bad thing to max out your tax-deferred accounts and still wind up having more funds in your taxable account than in a tax-deferred account. This guarantees that no matter what happens to tax rates in the future (as many expect tax rates to only increase), your accounts will offset each other (just like investing in index funds guarantees you'll earn market returns). If you have 90% of your investments in tax-deferred accounts and tax rates rise substantially, you might be wishing you had more in your taxable accounts.

One other item: I know you said you have health insurance through your employer...if they offer high deductible insurance plans, check out getting a Health Savings Account. All you need is a high-deductible health insurance plan (deductible greater than $1,100 for individual policy, or $2,200 for family policy).

There have been many threads on this subject: basically, you can contribute up to $2,850 or $5,650 for individual/family, respectively, to your HSA each year AND deduct it off of your taxes, REGARDLESS of your income! The funds grow tax-free, and your withdrawals are tax-free if used for health expenses. (it's the single greatest part of the tax code for individuals, and it has no income limits!)

There are a few other slight clarifications, but several posters on the forum (including me) have HSAs, and love them. If you have substantial annual health care costs, it's probably not going to be worth it, but if you and/or your wife are in fairly good health, it's an easy way to cut taxes and save additional $ in a tax-deferred/tax-free account. HSA Insider - The Nation's Leading Authority on Health Savings Accounts also has more info in an easy-to-follow format.
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Old 05-09-2008, 09:39 PM   #16
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At same time diversify the account types to use taxable accounts and tax efficient investments in those accounts. Muni bonds, growth funds and commodities come to mind.
To be clear, you want to hold equities in taxable and bonds in tax-deferred when your taxable space is large. The more efficient taxable holdings tend to be broad indexes (Total stock market, total international). You don't want to hold munis (generally) unless you don't have room for bonds in your deferred accounts. Commodities should definitely NOT be held in taxable accounts.
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Old 05-09-2008, 09:56 PM   #17
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See, I do it all backwards. Most of my taxable accounts are income producing, lower volatility and for consumption over the next 10-15 years. Everything in my tax deferred accounts is highly equity based and a lot more volatile, but thats okay because its all money I'll be tapping in 15+ years. That 2 bucket strategy thing...

So I guess it depends.
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Old 05-10-2008, 10:56 AM   #18
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If it helps you to think of your portfolio that way, go for it

Realize though that you are potentially less tax efficient this way. Consider that you can hold the equities in taxable, and when you need them you can sell and repurchase in your deferred accounts.

It took me awhile to realize this - but it literally does not matter if you consider your whole portfolio as a single portfolio. It does not matter if its all retirement even. Since you can 'access' your deferred accounts through rebalancing, it is all just an accounting trick and you gain the tax benefits as described.
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Old 05-10-2008, 03:09 PM   #19
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Realize though that you are potentially less tax efficient this way
Since I've only paid taxes in 3 of the last 7 years, I think its working okay.

When I did, my dividends and LT gains were all at 5% in every year except one.

In that one, I churned my entire portfolio so I got what I asked for.

The trick is to not have to make large withdrawals to pay big monthly debt payments, sheltering most of the rest of your income, and then just spend the dividends that come off the income funds. You look relatively poor to the IRS.
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Old 05-10-2008, 05:28 PM   #20
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Since I've only paid taxes in 3 of the last 7 years, I think its working okay.

When I did, my dividends and LT gains were all at 5% in every year except one.

In that one, I churned my entire portfolio so I got what I asked for.

The trick is to not have to make large withdrawals to pay big monthly debt payments, sheltering most of the rest of your income, and then just spend the dividends that come off the income funds. You look relatively poor to the IRS.
Yep. Plus I sold and ate the proceeds from our rental duplex in early ER - retiring from being 'da landlord' so to speak.

15th year of ER(age 64) has allowed my trad IRA to compound (93-till ? 2014) - if I continue to take div.'s or even spend down taxible - filing single plus the clock is ticking - so spending more cause I'm not getting any younger - no heirs to speak of in my case.



heh heh heh - I trying to fight off my tendency to be a cheap bastard now that being sort of thrifty the first 10 -14 yrs worked so well. .
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