Hi, FIRED. Not the good kind!

[Sunset]

Yes it does. And risky if you don't know exactly what you are doing. That's why I mentioned some folks hire an advisor to help them get it right.

Just read a lot.
Many folks hire someone to do their taxes, even though all they have is a job and bank interest. It's called being timid.
What do they do for RMD's hire an expert each year

In your reading, you will learn how 72t's are strict. So split an IRA into a two IRA's with one having all the money you will need for the 72t income in it. That one is untouchable except for 72t. This one gives you the income you want (or it can) based on the rules.

The other IRA is if you need a new car/roof/etc... that one you can in a severe emergency withdraw from and pay 10% penalty.

Of course when you get laid off, apply for unemployment, even if/not looking for a job.

Personally, I'd grab another job as they are plentiful still and even another year or two makes it simpler for you.
I would build up the regular savings and only put into any 401K to get the match. Would use Roth as well as a better savings vehicle when you get another job.

 

[rodi]

I retired 9 years ago at 52. I was in a similar financial position with a few differences - we had some rental income and some SS income for hubby and 2 minor kids. But we also had less money by a few 100k. (I think it was 1.45M when I retired).

Some thoughts:
- How solid are you on your spending numbers. My gross pay was FAR higher than my take home pay... when you take out payroll taxes (SS & Medicare tax), take out 401k contributions, take out ESPP payroll deductions we were living on less than 50% of our take home pay. You may not need as much money/year as you think. I worked my spending numbers in two ways to figure out what we actually needed...
* top down: take gross pay, eliminate all the things that go away when you retire (see list above, then add back in the new things (health insurance)
* bottom up: looking at actual spending.
I kept refining both till they agreed... That gave me a very good feeling that I'd gotten my retirement spending correct and hadn't missed any major items.

As others have mentioned - the 72T can help you withdraw from IRAs prior to age 59.5. I didn't need it, so I don't know the details. As far as fees - I think it varies among the financial institutions.

Also - if you can keep some of your retirement savings in your 401k (vs rolling to an IRA) **AND** your company supports the rule of 55 (most, but not all 401k's support this) you can start making withdrawals at age 55. You'll need to read your plan summary document and/or ask HR. (And if the HR rep doesn't know, keep digging/escalating till you find someone who knows or can give you the plan summary documents.)

I also found that my first 3-4 years I was afraid to spend... doesn't help that there was a dip in 2015, my first full year of retirement, that freaked me out. But I stayed the course, and it worked out. My fear resulted in less spending than I'd planned... which was probably not a bad thing.

And don't forget, you'll get unemployment till you find your next gig. And perhaps some severance?

 

[Koolau]

I think it kinda comes down to how badly OP wants to be FIRE'd (the good kind.) Two main levers other than dealing with penalties or manipulating the qualified money: Get a j*b. Cut expenses. Not a great choice, but either is possibly doable. I think I'd vote for getting a j*b for a while but that's just me.

 

[gauss]

SEPP- too complicated and restrictive and expensive to manage?
ROTH conversion that could be ready in 5 years?
Do nothing and just pay the penalty if I need the money?

Thanks for your help!

I solved this with Roth conversions. As such it was a perfect time to do it when I didn't have any W2 income and the TCJA tax rates are in effect.

Also if you have access to a Roth 401k at work that allows in-plan conversions and partial distributions and you have funds currently in a traditional 401k of the same plan, there is a bit of a loophole that may help you get around the 5-year waiting times.

TLDR - Roth 401k to Roth IRA rollovers are partially applied to Roth contribution basis (to the extent that the distribution represents "investment in the contract" vs growth after the funds are in the Roth 401k). There is no 5 year wait for Roth IRA contributed funds vs the Roth IRA conversion basis (which has the associated 5 year clocks). Full details in IRS form 8606 instructions.

Roth conversions now may also help you avoid Medicare IRMAA surcharges down the road .

-gauss

 

[gauss]

Also - if you can keep some of your retirement savings in your 401k (vs rolling to an IRA) **AND** your company supports the rule of 55 (most, but not all 401k's support this) you can start making withdrawals at age 55. You'll need to read your plan summary document and/or ask HR. (And if the HR rep doesn't know, keep digging/escalating till you find someone who knows or can give you the plan summary documents.)

+1 (with a caveat) edit: See update below about OP being age 52 currently and j*b loss is imminent.

I would look for the term "allows partial distributions" vs requiring a full distribution and not get too hung up on the "Rule of 55" language -- at least initially. . This should be defined in the plan documents and/or the rep should be able to answer this simple question. If the company doesn't know anything about the informal "Rule of 55", you, on your own, can handle waiving the penalty if the company doesn't code for it properly on the 10990R when you file your taxes on IRS form 5329, but you will need to be able to take a paritial-distribution from the 401k for any of this to happen. IRAs do not have the luxury of the rule of 55 tax treatment.

Also regarding plan documents, please realize that there are both the (SPD) ie Summary Plan Description that you will likely be able to easily find on the plans web site and or may have been mailed to you in the past.

There is also the full plan documents that legally define the plan. These are also available but you will typically have to write a letter to the plan administer requesting them following the procedure described in the back of the SPD documents. The plan may also charge you a copying fee for the full plan documents, but in my case it was waived.

All of this is based on the assumption that your plan is an ERISA qualified plan and that the ERISA rules/laws apply.

edit:

"Rule of 55" may not apply in this case. OP suggested he may loose the j*b soon and is currently age 52. You need to separate from your employer in or after the year you attain age 55 for this to apply. Now if OP gets a new job with a 401(k) that allows in-bound rollovers and keeps until Jan 2 or so the year he turns 55, then this may be an object.

Actual verbiage from IRS From 5329 that addresses this is below:
"Qualified retirement plan distributions (doesn’t apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). For distributions to qualified public safety employees on or after December 30, 2022, include distributions to employees with 25 years of service with the plan, distributions to firefighters covered by private sector retirement plans, and distributions to those employees who provide services as a corrections officer or as a forensic security employee, providing for the care, custody, and control of forensic patients, who meet the age requirement above."

-gauss

 

[momoney]

Also if you have access to a Roth 401k at work that allows in-plan conversions and partial distributions and you have funds currently in a traditional 401k of the same plan, there is a bit of a loophole that may help you get around the 5-year waiting times.


-gauss

Here is what I see in 401K for After tax and Roth contributions

Basic After Tax: $14,430
Supplementary After Tax: $23,002

Basic Roth: $4800
Supplementary Roth: $19,000

And at bottom of statement it lists $38,184 (does not = above after tax?) in after tax contributions available for Roth Opportunity?

Wait to act on this until my income is low for tax purposes?

What about an IRA Rollout split?
Roll after tax contributions to a Roth IRA and the earnings to a Traditional IRA?

 

[gauss]

Here is what I see in 401K for After tax and Roth contributions

Basic After Tax: $14,430
Supplementary After Tax: $23,002

Basic Roth: $4800
Supplementary Roth: $19,000

And at bottom of statement it lists $38,184 (does not = above after tax?) in after tax contributions available for Roth Opportunity?

Wait to act on this until my income is low for tax purposes?

What about an IRA Rollout split?
Roll after tax contributions to a Roth IRA and the earnings to a Traditional IRA?

You have a complicated situation -- which can be a good thing from the perspective of planning opportunities.

You seem to have a 401(k) plan that has 3 components available to you, if I am reading this correctly. A traditional (pre-tax contribution) 401k A traditional (after-tax contributions) 401k and a Roth 401k (aka designated Roth account).

You also appear to have exiting balances in the after-tax and Roth subaccounts of your 401k.

Additionally, you have 2 competing objectives going on here.
#1) Minimize income taxes
#2) maintain sufficient cash-flow to meet your expenses until age 59 1/2 without incurring ER penalties.

There is also the issue that if you exhaust your penalty-free funds prior to age 59 1/2 (which looks like it might happen in the next 4.5 years), you will be faced with the choices of setting up a 72(t) plan and the potential risk of violating the IRS rules somehow vs just paying the ER 10% penalty on the funds that you will need.

Without doing a comprehensive deep dive into all of this,personally, I would probably just start doing Roth conversions now and keep track of the 5-year clock for each conversion until when you can access the basis of the converted funds without tax or penalty.

Have you ever taken a Roth IRA distribution yet? If not, be advised that you may have some serious record-keeping issues ahead to figure out your Roth IRA contribution basis and conversion basis on lines 22 and 24 of IRS form 8606. Your tax software will not help with this. When I did this I, it had been less than 10 years since I began funding my Roth IRAs so I was able to obtain all the tax documents from the IRS via wage & income transcripts.

Also, have you looked into I-ORP yet? If found that to be particularly useful when I went through this exercise 10 years ago before I left the w*rkforce.

Good Luck! I think you will be okay if you have a handle on your expenses and are flexible.

-gauss

 

[cyber888]

Correct and then analyze your situation and see if there are any opportunities to withdraw penalty free:
72t
Saved up HSA bills
Rule of 55 with current 401k
Roth contributions
Cash in an old whole life policy
Pay the 10% penalty
https://www.madfientist.com/how-to-access-retirement-funds-early/

Do the 72T, so no 10% penalty. You need to take $ from your $1.9 mil account. Your cash won't last you till 59.5.

 

[momoney]

Personally, I'd grab another job as they are plentiful still and even another year or two makes it simpler for you.
I would build up the regular savings and only put into any 401K to get the match. Would use Roth as well as a better savings vehicle when you get another job.

In your opinion, what's the minimum salary required to make this work?

 

[momoney]

Also, have you looked into I-ORP yet? If found that to be particularly useful when I went through this exercise 10 years ago before I left the w*rkforce.

-gauss

I-ORP gives me $88K in disposable income at present.

Am I reading this right? It's taking from Tax Deferred account first?

 

[Bigdawg]

there are numerous scenarios where you can make this happen. That 72k expenses sounds somewhat flexible. You could do a combination of many things. #1. Start a cd ladder with the 320K. I would go 35k each at 6 months/1 year/18 months/2 year/etc... If you actually spend the 72k/yr you are OK for 4.5 years. That's with no interest from the CD's. Many are paying over 5% now. 4.5 years gets you to 56.5/57. In those 4.5 years you can #1-collect unemployment for 6 months. #2-find ways to reduce that 72k to 65k or less. #3-HELOC on the house. #4-ROTH conversion ladder. #5-explore part time gigs. (I make over 15k/yr officiating sports). Worst case is you have 2 draw early from the retirement accounts for a year or 2. Many job opportunities for remote work. I still get Linkedin emails daily. IF you definitely don't want to work at a new JOB, there are ways to get you from here to there. Good luck.

 

[pb4uski]

New to thread. OP has three challenges.

First, does he have enough saved given his planned spending... I think the answer to that is yes with little question.

Second, can he get penalty free access between now (52) and 59-1/2... for next 7-1/2 years. Between taxable account money, Roth conversion ladder and a 72t I think the answer is also yes.

Finally, how to best calibrate a mix of taxable account money, Roth conversion ladder and 72t to optimize ACA and college assistance.

 

[pb4uski]

....Here is my problem. These calculators don't take into account the percentage of funds in taxable vs. retirement accounts?

I'm looking for jobs and don't plan to FIRE yet. What can I do to get myself to 59.5 without paying a bunch of penalties if I need this money?

SEPP- too complicated and restrictive and expensive to manage?
ROTH conversion that could be ready in 5 years?
Do nothing and just pay the penalty if I need the money?

Thanks for your help!

I don't think that you need to get too wrapped up on taxes. If you need $72k a year for spending, you can get $42k from your taxable accounts ($320k/7-1/2 years from 52 to 59-1/2) so you'll need $30k from tax-deferred accounts.

If you took the remaining $30k out of tax-deferred via a 72t you would need to gross it up taxes, but the combined federal/state tax at that level of income is less than 10%, so if you set up the SEPP for $33k penalty free and paid $3k in taxes that would leave you $30k.

If it was me, I would set up the 72t for more to leave yourself a little leeway for the unexpected.

https://www.irscalculators.com/tax-calculator

 

[momoney]

i-ORP

Another post suggested running i-ORP.

Can anyone explain what's going on with the large withdrawals from tax deferred in early years?

 

[Out-to-Lunch]

Another post suggested running i-ORP.

Can anyone explain what's going on with the large withdrawals from tax deferred in early years?

With I-orp, you probably should tell it that the composition (i.e., the AA) of each of your subaccounts is the same. Otherwise, it tends to eat up the lowest-expected-earning account first, and unreasonably preserve the highest-earning-account. Could that be the root of your result?

 

[Out-to-Lunch]

Also, I just realized that (in extended i-orp) you can tell it NOT to make any early withdrawals. You might try that to see what happens.

Early Retirement Tax-deferred Account Distribution Strategies.

Early Retirement (ER) is defined by ORP to be the ages between retirement and 59 1/2, the age at which you can withdraw from your tax advantaged accounts without the 10% early withdrawal penalty. The IRS has rules about withdrawing from your Tax-deferred Account during ER. ORP offers you these options:
Amount Conversions
Allowed Description
Blank No Pay penalty on withdrawals for spending, no conversions. It is frequently the case that ORP will use the withdrawal with penalty to pay taxes with this option.
Blank Yes Conversions, without penalties are allowed. Additional withdrawals, with penalties, are also allowed.
0 No No Tax-deferred Account withdrawals of any kind are allowed.
0 Yes Conversions are allowed but additional withdrawals are not allowed.
>0 No Fixed SEPP withdrawals are made every year, no conversions.
>0 Yes Fixed SEPP withdrawals, in addition to conversions, are made every year.

A 457(b) plan is a tax-deferred retirement plan available to state and local government employees. If an employee retires before age 59 1/2 then 457(b) distributions are permitted without without the 10% early withdrawal penalty. ORP does not distinguish between 457(b) and 401(k) plans.

IRA to Roth IRA conversions are not subject to the 10% early withdrawal penalty. ORP may do conversions in parallel with both penalized withdrawals and with a SEPP. Personal income taxes are assessed on conversions.

Default: If this field is left blank and IRA to Roth IRA conversions are not requested then ORP applies the 10% penalty to Tax-deferred Account withdrawals during ER.

 

[gauss]

Another post suggested running i-ORP.

Can anyone explain what's going on with the large withdrawals from tax deferred in early years?

Did you check to see if it is doing Roth Conversions with the tax-deferred withdrawals in the early years?

Also, you may want to put in some simpler test scenarios, initially, to get a better handle on how I-Orp works.

-gauss

 

[Al18]

You should check the withdrawal rate allowed for 72T plan. The current high inflation rate allows you to withdraw more than when the rate was low 18 months ago. However 72T is not flexible once started.

Any way to stay at your current job with reduced hours until the year you turn 55, and qualify for 401K withdrawals without penalty? If not, look for another job and contribute just enough in 401K to get the company match. Maximize after tax savings to build up enough money to bridge the gap to 59 1/2.

 

[momoney]

I don't think that you need to get too wrapped up on taxes. If you need $72k a year for spending, you can get $42k from your taxable accounts ($320k/7-1/2 years from 52 to 59-1/2) so you'll need $30k from tax-deferred accounts.

If you took the remaining $30k out of tax-deferred via a 72t you would need to gross it up taxes, but the combined federal/state tax at that level of income is less than 10%, so if you set up the SEPP for $33k penalty free and paid $3k in taxes that would leave you $30k.

If it was me, I would set up the 72t for more to leave yourself a little leeway for the unexpected.

https://www.irscalculators.com/tax-calculator

What does the IRA account for a $33K SEPP look like?
Is it $560,000? And you would withdraw $247K over 7.5 years?

What would be an ideal way to structure the $560K for 7.5 years of withdrawals? CD/Treasuries for XX amount and rest in equities?

Which fed rate am I taking from the 120%-Mid: Annual, Semiannual, Quarterly or Monthly?
https://www.irs.gov/applicable-federal-rates

 

[pb4uski]

You should do some additional reserarch and talk with your financial advisor. I know about them but have never done one, but from the calculators available it looks to me like you could move $750k to a separate tIRA and then start 72t SEPP withdrawals of ~$33k annually and avoid the 10% penalty. If the tIRA were invested a bond ladder that yielded 5% then you would still have most of your $720k left after 8 year of payments. YMMV.

Also see https://www.bankrate.com/retirement/72-t-distribution-calculator/

 

[Morgan22]

You should do some additional reserarch and talk with your financial advisor. I know about them but have never done one, but from the calculators available it looks to me like you could move $750k to a separate tIRA and then start 72t SEPP withdrawals of ~$33k annually and avoid the 10% penalty. If the tIRA were invested a bond ladder that yielded 5% then you would still have most of your $720k left after 8 year of payments. YMMV.

Also see https://www.bankrate.com/retirement/72-t-distribution-calculator/

Please do not use the bankrate.com calculator! The numbers are not calculating properly. I believe they still have not updated to the latest IRS life tables.
https://www.dinkytown.net/java/72t-calculator.html <--- Use this calculator or do your research on the 72tnet.com website.

 

[madman]

Yes that still shows success.

Great advice in the thread.

For me the default from Fidelity to a significantly below average is a money grab. The more $ in your account the more $ they make. IMO, they want you to over save to keep adding value to your 401K so they make more $. When I hit planning on my 401K.com it defaults to significantly below value and shows I will be -$1K short per month of goal. Below average is +$4600 over goal per month. Average is +$15,125 over goal per month or $293K p/y. It is putting my monthly income at $24,477 per month on avg and I am only at "good", not "excellent" status LOL. Fidelity does not want you to FIRE, once you FIRE and start pulling $ instead of adding they make less $. Done with the rant.

 

[clifp]

I can't add much substantive advice, to the excellent and thorough advice you recieve.

I will say that my friend got laid of in 2007 at exactly your age, with a bit less money in taxable accounts and under a million in a 401K. He did have a house though.
His plan was to go back to work after a year or so off, but the great recession interfered and he never found another job.

Back of the envelope after you set up a 72(t) and or do some Roth conversion, you may still be short ~200K. The penalty for that is only 20K, in the context of over 2 million assets that only 1% about what a financial advisor would charge you for a year. I know it is a lot money, but it won't ruin your retirement.

Second, you might want to consider taking out a mortgage, after rates drop, the cost for mortgage might be less than penalty.

 

[Dtail]

Great advice in the thread.

For me the default from Fidelity to a significantly below average is a money grab. The more $ in your account the more $ they make. IMO, they want you to over save to keep adding value to your 401K so they make more $. When I hit planning on my 401K.com it defaults to significantly below value and shows I will be -$1K short per month of goal. Below average is +$4600 over goal per month. Average is +$15,125 over goal per month or $293K p/y. It is putting my monthly income at $24,477 per month on avg and I am only at "good", not "excellent" status LOL. Fidelity does not want you to FIRE, once you FIRE and start pulling $ instead of adding they make less $. Done with the rant.

I will state that the scoring with the different modules in Fidelity needs to be changed. The scoring stays the same no matter what module one uses. Just the amount one has left at the end of one's projected life changes.
I pointed this out to Fidelity and they agreed it is incorrect, but have not changed it.
OTOH, I still find it to be a somewhat more conservative tool to be used in conjunction with Firecalc.

 

[eytonxav]

It seems to me the job market is still good, so I would live off your taxable/unemployment/severance until another job comes along. If not, a 72t at some point. Also, as others suggested a CD ladder and roth conversions are also something to consider.