Early Retirement Planning: Penalties
Manage the legal pitfalls inherent in early retirement planning.
In planning for early retirement, timing is everything. Although 59½ IS commonly viewed as the age for starting to receive retirement plan
distributions without a 10% federal penalty, you can get access to your money in
a company plan such as a 401(k) if you retire as early as 55. The catch is, you
have to get off that employer's payroll.
If your early retirement plans call for you to retire younger than
that, you'll pay a penalty for spending the money early unless you follow a
certain set of rules for withdrawing it. Some company plans allow this, others
don't. If yours doesn't, you'll have to roll your money into an IRA first and
then start the withdrawals.
Wise leverage of the Roth IRA is a powerful tool for planning early retirement. A Roth IRA allows tax-free and penalty-free withdrawals of your
contributions before you hit 59½, however, you have to wait five years to
withdraw if you have made conversion contributions from a traditional IRA.
Tax-free and penalty-free withdrawals of Roth IRA earnings are, in most cases,
allowed after age 59½.
Strategy for Early Retirement Planning
If your early retirement plans call for it, here's a strategy to
consider for preage-59½ withdrawals from traditional IRAs if you want to
avoid the 10% premature withdrawal penalty. Here's how to make this early
retirement strategy work: Take the cash in installments based on your life
expectancy. Each year, you can withdraw a fraction of your balance derived from
the number of years you are expected to live.
What this means for early retirement strategy is, if actuarial
tables predict you have another 30 years to live, you can withdraw 1/30th of the
balance of your account each year. As long as you make these annuity-like
withdrawals each year, you don't have to pay the 10% premature withdrawal
penalty. You'll need to continue with the schedule only until you reach 59½
or for at least five years, whichever is greater. After that, you can change the
schedule however you wish to support your early retirement needs.
We don't recommend you do this unless your early financial and
retirement planning
suggests you must have the income. The 10% penalty for early withdrawals will
also be waived if you need the money because of death, disability or to pay
medical expenses in excess of 7.5% of your adjusted gross income.
If you do take early withdrawals, consult with us at Associated Tax to
leverage our deep experience in planning tax-smart IRA distributions.
Contact Dennis
Cozen about early retirement planning to
learn how we can help you.
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