Dreaming of retiring early? You’re not alone—more people are aiming for early retirement and the freedom to live life on their terms. But here’s the catch: If you’re planning to retire before 59 and a half, accessing your retirement funds can get tricky. Normally, you can tap into your retirement savings without penalties once you hit that age, but what happens if you want to retire earlier than that?
Let’s break down how you can access your retirement savings, avoid penalties, and make sure you’re set up for early retirement.
Keep Contributing to Your Retirement Accounts
Your retirement accounts, like a traditional IRA or a 401(k), are meant to be your safety net when you’re done working. They’re designed to fund your retirement living expenses, and many people get an employer match on their 401(k), which is essentially free money—don’t pass that up!
Now, if you’re younger than 59 and a half, you can’t just take money out of these accounts whenever you want. If you do, expect a hefty 10% penalty, in addition to regular income taxes on the withdrawals (since you funded these accounts with pre-tax dollars). Early retirement is generally not considered a “special circumstance” for penalty-free withdrawals.
That doesn’t mean you shouldn’t continue contributing to these accounts, though. Prioritize saving as much as you can into these accounts to make sure you’re set for your later retirement years.
Consider Funding Taxable Accounts
If you’re planning on retiring early, a taxable brokerage account might be your best friend. With a taxable account, you can withdraw money at any time without worrying about the 10% penalty—what you’ll owe is taxes on any investment gains. Since you fund these accounts with post-tax dollars, there won’t be any additional taxes when you pull out funds (though, again, gains will be taxed).
To figure out how much you need in your taxable accounts, think about when you want to retire. For example, if you’re aiming for early retirement at 45, you’ll need to have enough saved up to cover your expenses until you’re 59 and a half (the age when you can start withdrawing from retirement accounts without penalties). This gives you the flexibility you need for early retirement.
Roth IRA: A Great Option for Early Retirement
A Roth IRA is another great tool to consider if you want to retire early. Here’s why: With a Roth IRA, you can withdraw your contributions (the money you put in, not your earnings) at any time without paying taxes or penalties. Even better, once you reach 59 and a half, your investment gains are also tax-free!
It’s important to note that Roth IRAs have contribution limits, so you can’t use them to stash away all your retirement savings. However, they’re an excellent option for your early retirement strategy, as they give you more flexibility with your withdrawals.
Planning for Early Retirement? Get Expert Guidance
Planning an early retirement takes careful thought and strategy. You don’t want to be left scrambling for cash when the time comes to quit your job, so it’s important to understand how to manage your savings and investments. Whether it’s using taxable accounts, leveraging a Roth IRA, or knowing when you can dip into your traditional retirement accounts without penalties, having a solid plan is key.
For help with creating a strategy that works for your early retirement goals, consider reaching out to a CERTIFIED FINANCIAL PLANNER™. They can help you organize your accounts, ensure you have the right savings in place, and give you peace of mind for your post-work life.