Withdrawal strategy to 65

[Beachbound]

I know this topic has been discussed many times before- but my many searches still leave me with questions- I will retire in 3 months at the age of 55. Have enough cash and future payouts from leaving company after 28+ years to fund the next 2 years of living expenses.

At 57 - I’ll have to begin withdraws from my 401k.

My 401 k = 1M
Spouse 401k = 200,000

Pension I can take from any point, but holding off until 65, along with SS for both would cover all living expenses with some room to spare. I can take pension as quick as today- it would be $20,000 less a year than at 65

So really just need the 401k to find the gap to 65. 95% is pre-taxed. $100k yearly spending now need has been consistent.

Will also be leaving current home in 3-4 years which will add another 100k+ to cash line after move and purchase to downsize to forever home.

What’s the best way to set up my withdrawals- spend all my available cash first- then access 401 k as needed?Set up a lower withdrawal right away and supplement with one hand cash to avoid the big tax penalties and stay under ACA thresholds for a longer period of time? Set up an annuity for 8-10 year term to secure needs and then have cash on hand as needed, or reinvest?

At the end of the day- I know we have enough for what we need. 65 on- I feel comfortable. It’s from 55-65 that the unknown comes in to play.

 

[RunningBum]

It looks like you wouldn't be able to qualify for an ACA subsidy every year? Make a spreadsheet to map out different strategies.

One might be to minimize 401K withdrawals as long as possible to get the subsidy for as many years as you can.

Another might be to alternate years, so that one year you load up income to put aside extra money for the next year. So you could take withdrawals up to the top of the 24% bracket one year, and the next year keep income low for the subsidy. ACA premiums and subsidy amounts vary from year to year so you might even try to wait and see how valuable a subsidy will be to decide whether to take it that year, or load up cash for the next year. If the ACA cliff returns, this is even more important. Rather than just miss a subsidy every year, blow well past the subsidy income level one year to set yourself up for a subsidy another year.

Be aware that at age 63 your income is used to determine IRMAA levels at 65. This is usually much less of a hit than ACA subsidies, but keep it in mind.

If the ACA subsidy wasn't a factor, I'd say you should just try to level out your income over those 10 years, which would probably mean spreading out your cash and your 401K withdrawals pretty evenly.

 

[VanWinkle]

There are many ways to make withdrawals, but the most important for your 10 year period are taxes and ACA subsidies. I would divide my cash by 10(include your 100,000 downsize cash in year 4) and use that amount each year before filling in the spending gap with 401K withdrawals. That will give you the lowest taxes and highest consistent ACA subsidy. I did the same thing, but just from 61 to 65. My spending was also lower than yours. Good luck on your early retirement!!

VW

 

[Al18]

Living off long-term capital gains from the sale of stock/dividends in an after tax brokerage account, cashing in some CD’s and 401K withdrawals is a good way to minimize your taxes. You will likely be in the 0% tax bracket for long-term capital gains, while any withdrawals from you 401K will have automatic 20% Federal tax withholding.

 

[SevenUp]

For the next few years, the concepts and tool suggested in Roth Conversion and Capital Gains On ACA Health Insurance are worth considering. For annual tax/ACA purposes, a traditional withdrawal is the same as a Roth conversion.

For longer range planning, consider what Open Social Security: Free, Open-Source Social Security Calculator suggests.

Tax law, market returns, and your personal situation will change over time so take your best guess for this year, then update as needed for subsequent years. Enjoy retirement!

 

[Exchme]

First, you will need the bulk of your 401k in the next few years, so the portion you need should be low risk investments - CDs, TIPS, etc.

Prior to 59.5 years old you will have a 10% penalty for withdrawing from your retirement accounts. I think the top priority is avoiding that penalty. You can avoid it by rolling to an IRA and doing a 72t withdrawal plan - that could get you $63K from your IRA each year (you must take that for a minimum of 5 years). These are complicated to set up and very stringent, use and accountant to set it up and then follow it to the letter or the whole amount withdrawn can be subject to the 10% penalty. You can evaluate that type of plan to also optimize ACA premium credits. If you want to spread out the cash draw further, you can set up a similar (though proportionally smaller) amount from your spouse's IRA.

 

[RetiredHappy]

I believe that maybe no penalty for early withdrawal as long as the funds are kept as the employer's sponsored 401K as OP is leaving at the age of 55.

The Rule of 55
If you lost your job or retire when you're age 55 but not yet 59½, you might be able to take distributions from the 401(k) without the 10% early withdrawal penalty. The IRS allows an employee—who has been separated from their employer—to receive a penalty-free distribution from the qualified plan in the year of turning 55 or older.
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However, this only applies to the 401(k) from the employer you just left, not any earlier employer plans, nor any of your individual retirement accounts (IRAs). For your other accounts, you would have to wait until age 59½ to take distributions penalty-free.

Rule of 55
An exception to the early withdrawal tax penalty exists if the distribution is made after separation from your company's service if the separation occurred during or after the calendar year in which the participant reached age 55.
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However, if you transferred or rolled over your IRA funds from your previous employer into your current 401(k) before you retire at age 55, those funds would qualify for penalty-free distributions.
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You must also check with your retirement plan administrator since not every defined contribution plan allows withdrawals earlier than 59½.

 

[Surewhitey]

I'd rather work 1 more year than pay the 10% penalty & tax on the 401k.

If not a choice I'd withdraw just enough 401k to get the max ACA benefits & then take from my cash. While doing that, learn to live on less than $100k...that's almost 2x our lifestyle as I write from the Azores...

We have a 50/50 pre - post tax plan for exactly this in a few years @55...

 

[COcheesehead]

An example of why people should have more in a taxable account. That can really provide a bridge and solves for both ACA and income.

 

[NgineER]

Didn't read through everything in detail, but 72t is also a solution for accessibility of the 401(k) money without penalty. There is some hassle with respect to setting up and managing, but much better than paying 10% penalty.

 

[qwerty3656]

An example of why people should have more in a taxable account. That can really provide a bridge and solves for both ACA and income.

Or Roth - you can withdraw the investment portion

 

[Al18]

As RetiredHappy pointed out, using the Rule of 55 there shouldn't be any penalty on the 401K withdrawal.

 

[Brett_Cameron]

Make sure your 401k's Summary Plan Description (SPD) allows early withdrawal and determine what restrictions the plan has. When I retired at age 55, my 401k allowed early withdrawals but I was required to withdraw at a certain percentage over a fixed number of years. Study the SPD carefully and talk to your plan's administrators.

 

[FLSUnFIRE]

An example of why people should have more in a taxable account. That can really provide a bridge and solves for both ACA and income.

Yes, but! If not maximizing tax deferred first, there is a cost too (tax free growth along with writing off taxes). It's possible to pay the 10% penalty at withdrawal and still come out ahead through tax free compounding and a potentially higher tax savings earlier. It's hard to eat the 10% but it may not be the worst option.



To the OP, I have a rather long gap and plan to eventually start a SEPP and will decide when as my taxable gets more depleted. I'm not sure what my threshold is yet. I've found that my cash on hand to fund my first year and a half expenses lasted longer and last year I liquidated my taxable account to optimize taxes in excess of what I'd need to get through the year. I would consider several options/contingencies and be prepared to adjust based off actual expenses/market results.

 

[COcheesehead]

Yes, but! If not maximizing tax deferred first, there is a cost too (tax free growth along with writing off taxes). It's possible to pay the 10% penalty at withdrawal and still come out ahead through tax free compounding and a potentially higher tax savings earlier. It's hard to eat the 10% but it may not be the worst option.
.

If you were a heavy saver like me, you can have your cake and eat it too. I maxed out my deferred and put $3m into a taxable account. We are living 100% off the taxable right now.

 

[Aiming_4_55]

I turn 55 next year and will probably retire, so this is what I was thinking. Is your wife the same age? That could impact access to 401k timing and SS, etc.

In your shoes, with $200k cash (2 years of spending covered) and another $100k+ in 3 - 4 years (from house), would it be worth considering: Use Rule of 55 (if available to you) - Using $33k cash per year and withdraw $70k per year from 401k? This way you can leverage ACA for most of the 10 years vs using all cash for 3 years then making $110k 401k withdraws, and no ACA for maybe 7 years? $110k withdraw would be $100k spending and ~$10k taxes payment.

Others, please keep me honest if that's a consideration and not a landmine.

 

[Surewhitey]

If you were a heavy saver like me, you can have your cake and eat it too. I maxed out my deferred and put $3m into a taxable account. We are living 100% off the taxable right now.

+1 just not to your size... We have enough to carry the bridge years for sure.

 

[Beachbound]

Thank you all so much for the advice. Lots of ideas to look in to more. The monies from the 401k are all from the same employer I will be leaving- They do not participate in the “rule of 55”, so the 10% penalty would apply at any withdrawal- but someone told me that would come back later at tax time from the IRS rule of 55.

The SEPP commitment for 5 years is an option, but it scares me a bit with the limits and requirements. Basically committing I will only take a set amount over the 5 years- if any crazy emergency or whatever does happen- I won’t have funds elsewhere to access besides my cash/SEPP.

I definitely think I need some combo of 401k funds/cash to use each year so I keep the Funds fluid and can base my pull amounts on what may be happening in the market-

As for the yearly budget- not a lot of play while currently in the big house, but lots of flexibility once we sell and move. Could always move up that timing if needed.

 

[Alex The Great]

They do not participate in the “rule of 55”

It cannot be true because this is a federal law.
But implementation can be different. For example some allow partial distributions while others stick to the entire amount distribution.

 

[SevenUp]

They do not participate in the “rule of 55”, so the 10% penalty would apply at any withdrawal- but someone told me that would come back later at tax time from the IRS rule of 55.

See the description under Rollovers from your 401(k) plan and the subsequent section, "Tax on early distributions," for a more authoritative source.

 

[USGrant1962]

It cannot be true because this is a federal law.
But implementation can be different. For example some allow partial distributions while others stick to the entire amount distribution.

Not participate means they won't do partial distributions. So you can only roll over to an IRA and mess with a 72(t), or cash the whole thing and pay a monstrous amount of regular income tax.

 

[Out-to-Lunch]

How about:
-Use your cash to fund the next two years.
-In two years time, execute a partial rollover from your 401(k) to a tIRA. Keep (and pay taxes on) 2.5 years living expenses. Deposit the remainder in a tIRA.
-This should take you to 59.5.

There would be no penalties; however, realizing 2.5 year's worth of income in one year would push you into a higher bracket, but it sounds like you could stay in the 22% bracket (or 24% for a little at the worst).

You would have to compare that to taking income as needed, and paying the penalty.

 

[orbops]

I will retire in 3 months at the age of 55. Have enough cash and future payouts from leaving company after 28+ years to fund the next 2 years of living expenses.

At 57 - I’ll have to begin withdraws from my 401k.

My 401 k = 1M
Spouse 401k = 200,000

Pension I can take from any point, but holding off until 65, along with SS for both would cover all living expenses with some room to spare. I can take pension as quick as today- it would be $20,000 less a year than at 65

So really just need the 401k to find the gap to 65. 95% is pre-taxed. $100k yearly spending now need has been consistent.

I retired at 50, am 56 now, and I have ACA subsidies dictating my AGI each year so that my ACA premium is $10/month. The key is to try and spread your 2 years of non-retirement money to 4.5 years without taking the early withdrawal penalty. Is there any way you could cut back on $100K yearly spending? Since 5% of your 401K is post-tax, is it in a Roth 401K or just post tax 401K? You should be able to access that 5% (50K) during the 4.5 years.

Also, consider getting an HSA account through ACA. I did that, so I'll be able to lop off $9750/year AGI for both my wife and I since we're both over 55.

Is your spouse still working? If so, that essentially defines your AGI. If you can stay in the 10% or 12% tax bracket, then also consider using IRA rollovers to a Roth to define what your AGI will be.

 

[Out of Steam]

An example of why people should have more in a taxable account. That can really provide a bridge and solves for both ACA and income.

We didn't have the ACA issue, and still have run into issues with insufficient funds in taxable accounts, such as having to make large purchases on a credit card while waiting for transfers from retirement accounts.

We will finally fix the problem by continuing 3.5-3.7% annual withdrawals from retirement accounts after my wife starts receiving Social Security payments, even though the amount isn't needed to meet our ordinary expenses.

 

[Slim11]

Why not take the pension now? Yes , it 20 k less a year. But 1m at 4 percent compounded for 10 years is about 500k. That will exactly make up the 20 k loss on o yrest alone? No penalties on taking it out of the 401k.