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Advice & question on retiring at 52 in 2022
Old 01-01-2021, 10:02 AM   #1
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Advice & question on retiring at 52 in 2022

From my username - I missed retiring (my choice) in 2018...Now, with a grandchild and other factors - I am committed (*I think*) to retire in mid-late 2022. I would stay at least until June, but employer might ask for partial/part-time after that. I will not discuss with employer until much closer to June 2022. But, there is a chance, that I work remotely/part-time beyond this date. I am not considering that in this analysis.

Here's background financial info (with some assumptions) -k

Brokerage account with index funds (cost basis if 50-60% of funds) - $1.5M
Roth 401k and Roth IRAs - $800k
Trad 401k - $1.4M
Cash - $300k
No debt.

We will move closer to children to TN or TX. Use house sell proceeds and potentially some of cash to facilitate this.

Desired living income - $120k +/-
Not accounting for health insurance.....

So - questions -
1 - How does one access 401k and IRA before age 59.5 (without equal payouts) without the 10% penalty? I know I can pull out my Roth contributions (that's about half of the $800k). How early can one start substantially equal withdrawals, and what flexibility is there in changing that?

2 - From a simulation perspective, what would be alternatives for usage of money for health care expectations?
2a - Use brokerage? I think math would be about $15k in dividends, rest in long term capital gains. I could get close to $120k with <$60k in dividend & capital gain income. Real taxes would be very low, and healthcare would be ACA?? Is that right? Newbie at looking into this. At age 65, look at other options? Even at 0% market return, that should get us really close..
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Old 01-01-2021, 10:06 AM   #2
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Thanks in advance!
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Old 01-01-2021, 10:36 AM   #3
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1 - How does one access 401k and IRA before age 59.5 (without equal payouts) without the 10% penalty? I know I can pull out my Roth contributions (that's about half of the $800k). How early can one start substantially equal withdrawals, and what flexibility is there in changing that?
You want to read up on Rule 72(t).
https://www.investopedia.com/terms/r/rule72t.asp

You can set it up and begin taking distributions at any age.

There is no flexibility in changing distribution amount when using 72t. However, I believe you can work around that limitation and set up a clean equivalent that would allow you to increase (but not decrease) distributions in the future.

Decide how much you (currently) want to withdraw between now and 59.5. Roll that amount in to a new IRA. Then have Fidelity or whoever your broker is set it up for 72(t) (monthly/annual) distributions for the entire amount of the new IRA.

If some time in the future, you decide you want to increase the amount of the distributions, roll another chunk in to another new IRA, and once again set it up for 72(t) distributions.

I believe this would cleanly allow you to take distributions early and stay within the 72(t) guidelines with the ability to "increase" distributions if necessary. You might be able have multiple 72(t) withdrawal plans working in a single IRA, but I think that if you segregated the money and had a single 72(t) distribution plan from a single IRA it is much cleaner, straightforward, and wouldn't raise red flags.
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Old 01-01-2021, 10:38 AM   #4
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Originally Posted by retire48in2018 View Post
-

1 - How does one access 401k and IRA before age 59.5 (without equal payouts) without the 10% penalty? I know I can pull out my Roth contributions (that's about half of the $800k). How early can one start substantially equal withdrawals, and what flexibility is there in changing that?
..

DW and I both FIREd ASAP at age 54 by resigning then accessing our 401ks penalty-free by using the Rule of 55, which becomes possible in most plans during the calendar year in which one turns 55. There are threads here and online about the Rule of 55.
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Old 01-01-2021, 10:48 AM   #5
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My DH retired in 2015 at 57. He was not able to have access to his 401K until he was 59.5. We had a lot of company stock which we able to do an Net Unrealized Appreciation with the company stock which we had for over a year. We left the stock alone for a year so we would only have to pay long term capital gains tax. We took enough out for 5 years till DH got social security at 62. It worked great for us.



No rule of 55 was available to us through my husbands company 401k.
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Old 01-01-2021, 10:55 AM   #6
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No rule of 55 was available to us through my husbands company 401k.
That's interesting, are you sure? I don't see how the company could stop you from withdrawing from your 401K at any time? Whether you pay taxes and penalties is between you and the IRS, and the IRS adhere's to the rule of 55. I'm no expert so could be wrong, but I do find this surprising.
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Old 01-01-2021, 11:00 AM   #7
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You have large brokerage accounts and Roth accounts, getting money out of your retirement accounts before 59.5 is optional.
If you want to do it, I would suggest to do Roth conversion from IRA accounts to Roth accounts and take money out from your Roth accounts.
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Old 01-01-2021, 11:01 AM   #8
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Back of the envelope calculations:

So you need approximately 120K +24K health (guesstimate) +16K (guesstimate) taxes=160K per year from investments.

You have 1.8 Million in taxable that would need to last until you are 59.5. I believe you would be 52 when retired so 8 years x 160K per year is 1.3 Million.

I think you do not need to access your IRAs early.
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Old 01-01-2021, 11:43 AM   #9
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I also am confused why you want to tap your pretax 401k funds when you have sufficient cash, after tax money in brokerage and your (initial amount) Roth money. Both of those options should have minimal tax effect, if you are looking to keep income below limits for ACA subsidy qualification.


If you want to get some of the pretax money to use up some lower tax rate room, then you could do the 72t. Just separate out into a "72t IRA" account what amount you need to get your desired SEPP amount. You will need to take that SEPP for 5 years or until your turn age 59.5, whichever is longer. In your case starting at 52-ish, means you will need to plan to take it until 59.5. If you have excess amount, you could just reinvest it or as Robbie would say "blow that dough" on something fun or nice.
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Old 01-01-2021, 12:02 PM   #10
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I was trying to keep a diversity of options - tax wise. That’s why I wanted to keep some of each - as tax rules change I continue to have options.

Capital gains, to traditional to Roth
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Old 01-01-2021, 02:10 PM   #11
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This is what I would probably do between ages 52 and 60. Spend

$40K from cash ($0 tax liability)
$25K from Roths ($0 tax liability)
$40K from brokerage ($20K - $24K probably LTCG so minimal tax liability)
$15K dividends (minimal tax liability)

Which gives you $120K to spend
Then rollover $25K times 8years = $200K the first year to an IRA and each year convert $25K from the IRA to a Roth. Total AGI of $60K - $64K with most of it taxable at the 0% LTCG and qualified dividends rate. That gives you the equivalent of spending from the 401K instead of the Roths without penalties, helps to smooth tax liabilities, and reduces future RMDs. The first Roth conversion will be available to withdraw penalty free after 5 years.
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Old 01-01-2021, 02:28 PM   #12
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You probably don't need to fret about penalty-free access since you'll only have 7 1/2 years and you have more than that in taxable accounts (brokerage and cash). But, if the traditional 401k is from your current employer you would qualify for penalty-free withdrawals via rule of 55. Any you can withdraw Roth IRA contributions penalty free anytime as long as you have had the account for 5 years... and I suspect Roth 401k contributions as well. Bottom line... penalty free access isn't an issue for you.

I would retire and live off Roth contributions and then taxable and do Roth conversions to at least the top of the 0% preferenced tax bracket... that is $105,050 of income in 2020 for MFJ.
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