475 | How to Access Your Retirement Accounts Before 59.5 | Sean Mullaney
Feb 5, 2024
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Tax expert Sean Mullaney joins the show to discuss strategies for accessing retirement funds early, including taxable accounts, inherited retirement accounts, 457B's, roth conversion ladders, and the rule of 55. The discussion explores various options for withdrawing money before age 59.5 without penalties and provides valuable insights into maximizing tax efficiency for early retirees.
Spending down taxable assets first allows for better tax planning and creditor protection.
Inherited retirement accounts can provide an additional source of funds to support early retirement.
The 72(t) provision offers a pathway to early retirement funding for those with most of their funds locked in tax-deferred accounts.
Deep dives
Using taxable accounts as a primary source of funds
One of the first places to look for funding early retirement is taxable brokerage accounts. By withdrawing cash from these accounts, individuals can control their taxable income and reduce future uncontrolled income. Additionally, capital gains from stocks, mutual funds, and other investments can be taxed at a lower rate, further reducing the tax burden. Spending down taxable assets first allows for better tax planning and creditor protection.
Utilizing inherited retirement accounts
Inheriting retirement accounts can be another viable option for funding early retirement. Inherited retirement accounts, such as traditional IRAs or Roth IRAs, can be accessed without early withdrawal penalties. Individuals can empty these accounts within ten years, allowing them to use the funds to cover living expenses during early retirement. By considering inherited retirement accounts, individuals with substantial assets locked in tax-deferred accounts can find an additional source of funds to support their retirement.
Exploring the possibilities of 72(t)
The 72(t) provision can be an option for those in their early 50s or younger who want to retire but have most of their funds locked in tax-deferred accounts. Under the revised rules, individuals can make early withdrawals from traditional retirement accounts without penalties using the 72(t) calculation. The interest rate flexibility provided by recent changes makes this option more reliable. It is essential to understand the complexities of 72(t) and work with a professional to ensure proper execution. However, for individuals who lack significant taxable accounts, inherited retirement accounts, or Roth conversions, 72(t) can provide a pathway to early retirement funding.
Options for Early Retirement Withdrawals
When it comes to accessing funds for early retirement, there are several options to consider. One option is inheriting a Roth IRA, which allows for tax-free and penalty-free withdrawals. Another option is the rule of 55, which allows penalty-free withdrawals from a 401(k) if you leave your employer in the year you turn 55 or later. Additionally, some governmental 457(b) plans do not have the 10% early withdrawal penalty. Another strategy is utilizing Roth basis, which includes Roth IRA contributions and older Roth conversions, to withdraw tax-free and penalty-free after five years. Finally, if no other options apply, paying the 10% penalty on withdrawals before 59 and a half may be necessary.
Unique Considerations and Strategies
While exploring early retirement withdrawal options, it is important to consider individual circumstances and plan accordingly. For example, splitting IRAs into multiple accounts can allow for flexibility in managing 72(t) payments. These payments, which begin prior to 59 and a half, can be carefully calculated to meet lifestyle needs and potentially reduce taxes. It is important to review the precise rules and requirements of 72(t) plans, including the potential penalty for missed payments. Although paying the penalty before 59 and a half may be an option, it is generally recommended to explore other strategies first to minimize costs. Overall, careful planning and consideration of each option is key to successfully accessing funds for early retirement.
In this episode: taxable accounts, the 72(T), inherited retirement accounts, 457B's, roth conversion ladders, and the rule of 55.
This week we are joined by the “FI Tax Guy” Sean Mullaney to walk through examples and discuss some strategies you could use when accessing your retirement funds early. No matter where you are on your FI journey, there can come a time where retiring early becomes a feasible option, but there can be many stipulations and tax implications that come with withdrawing your funds before the age of retirement. Tune in as we discuss several different options you can pursue in order access your money without having to wait until the 59 and a half year old threshold.
The discussion is intended to be for general educational purposes and is not tax, legal, or investment advice for any individual. Brad and the ChooseFI podcast do not endorse Sean Mullaney, Mullaney Financial & Tax, Inc. and their services.
