Variables for withdrawing in ER?

[bo_knows]

ER folks, I'm fairly new to these forums, and being only 30 years old, this has been a great boon of knowledge for me.

I've been doing a lot of calculations based on our savings rates and a lot of other things, and I love love love creating big projection spreadsheets. I can easily project how my 401k, IRA, and taxable accounts will grow over the years based on contribution rates relative to my income, estimated returns, inflation, etc. What I am NOT good at is trying to figure out the variables in withdrawing that money in early retirement.

Assuming that my wife and I have a balance in 401k's, IRA's, and some taxable accounts, what are the tax implications that I need to look at if I'm withdrawing before age 59.5? I understand that you can avoid the 10% early withdrawal penalty for IRA's by doing a SEPP, but from what I understand, you can't take out significant amounts (say, enough to yield $40k in todays dollars). Also, I am not good with tax rates and such... what should I look into to determine how withdrawing $40k from retirement accounts will ACTUALLY cost me after taxes and such?

Also, I would love a bit of clarification on the SEPP. After reading more, it looks like you can in fact get bigger distributions. The calculator I used implied that you have to take IRA funds and put it "into" a SEPP account for distribution. So, if I had say $1M in an IRA, and wanted to benefit from SEPP distributions, do you have to set up a certain amount of that money to be off limits until you reach 59.5? Or can I take full SEPP distributions AND withdraw with a penalty if I need to? I ask because it seems that it'd be really hard to get full benefit of SEPP if your budget wasn't EXACT.

-Bo

 

[Independent]

If you love spreadsheets, you can become good with tax rates and such by setting up a spreadsheet that duplicates the math in a 1040.

Just take the form, copy the lines that you expect to be relevant to you in the future onto your spreadsheet, and copy the formulas. Then you can "what if" to your heart's content.

I have a relatively simple tax return. But I still have enough complexities to make this a worthwhile exercise for me.

 

[MasterBlaster]

Penalty Free Withdrwals from a Qualified (IRA/401K/403B) Account

What the OP refers to are (so called) 72-t withdrawals (or SEPP withdrawals )from a Qualified (IRA/401K/403B) Account.

Your IRA provider is well aware of the rules and can probably help you set up the withdrawals.

They are a bit tricky but are documented in many places.

I suggest you start here:

Retire Early: Can I withdraw money from my IRA before age 59½ ?

or here:

http://www.fool.com/retirement/manageretirement/manageretirement9.htm

So, if I had say $1M in an IRA, and wanted to benefit from SEPP distributions, do you have to set up a certain amount of that money to be off limits until you reach 59.5?

IF you have more money than you need in your IRA, just set up another IRA account with the exact amount you need for your SEPP. Then do the 72-t (SEPP) withdrawals from the right-sized account and leave the other one alone.

If you need to withdraw more than the 72-t rules allow then you'll have to pay a penalty on the excess.

 

[Animorph]

With a pretty high savings rate for ER you may find yourself maxed out for 401k's and IRA's. In that case you may have enough in taxable accounts to tide you over. Condsider Roth contributions now if you are in a low tax bracket or have maxed out your pre-tax contributions and can still make a Roth IRA contribution. Otherwise consider Roth conversions after you retire early and have no other income, so the conversion income stays in a low tax bracket. That will require money in a taxable account to live on and pay taxes while you convert. After Roth conversions, consider an IRA withdrawal up to the top of a low tax bracket and Roth withdrawal after that. Watch out for IRA RMD's which may require you to take out more than you'd like.

You'll definitely want a spreadsheet that estimates taxes and allows you to evaluate the optimum use of the above strategies along with early/late pension or SS benefits.

 

[bizlady]

You will also need to be familiar with your plans rules. 401's for example will allow you to withdraw penalty free before 59.5 IF you retire at 55 or older. Some plans (defined contribution plans as an example) may also allow this, but may have some rules for this as well. Rolling over from one of these plans to an IRA may result in the loss of access without penalty. So learn the rules and your plans should you switch jobs down the road.

 

[sn2792]

I retired at 57 and am withdrawing from my 401K to get me to 59.5.

 

[LOL!]

And don't forget that there is no restriction on withdrawing your Roth IRA contributions at any time and without penalty. So if you put $5,000 to $6,000 a year into a Roth IRA and so does your spouse, after 20 years, you all will have over $200,000 in contributions that can be withdrawn at age 50.

 

[scrabbler1]

If you love spreadsheets, you can become good with tax rates and such by setting up a spreadsheet that duplicates the math in a 1040.

Just take the form, copy the lines that you expect to be relevant to you in the future onto your spreadsheet, and copy the formulas. Then you can "what if" to your heart's content.

I have a relatively simple tax return. But I still have enough complexities to make this a worthwhile exercise for me.

This is an excellent idea. I have been doing this since the mid-1990s when I was still working but it has become more useful since I ERed back in 2008. Using the "skeleton" tax form spreadsheet is good to play out what-if scenarios and to make sure I pay enough estimated taxes now I do not have any money withheld from any dividend income and avoid any penalties .

Most recently, I played out a what-if scenario which "bunches" together some itemized deductions so that I can take the standard deduction in the off-years, saving me hundreds of dollars in taxes. My spreadsheet includes the cap gains and qualified dividends worksheet and links the state and federal skeleton income tax forms together. I have both of them linked to my checkbook register spreadsheet so I can allocate my various tax-deductible payments (or portions therein) and prorate them to a full year as the year progresses, all fairly easy calculations for me, and probably, easy for someone who loves loves loves creating these types of spreadsheets such as yourself!

I also do these skeleton spreadsheets for two friends (my ladyfriend and my best male friend) to make sure they have the right amount of withholding from their taxes. My ladyfriend recently will also been able to bunch some of her itemized deductions, saving her some taxes as well.