Using 401K before 59 1/2

csuave · April 2016

I told my financial advisor that I think I want to retire at age 55 and he told me that if I truly retire and am no longer working I can access my 401K at a younger age. If take out steady withdrawals in the same amount for my early retirement (as opposed to taking a lump sum out like $50K out to buy a car) it is an exception. Of course when I am closer to retirement age I'll have to decide which accounts make sense to tap, I might not even touch the 401K at that time, but now I know it is an option.

Learned something new yesterday and am now more excited about retirement!

Has anyone else heard of this and thinking about it as an option for early retirement?

formerlyjessica490 · April 2016

Interesting! I'm with you on retiring early but I don't have any kind of plans laid out yet...I'm only 33

bmo88 · April 2016

I didn't know this, but this article summarizes it nicely. It appears there are still a few catches. Notably:

1. You must be at least 55

2. It must be from your current employer's 401k plan.

But still good info to know!

http://money.usnews.com/money/blogs/on-retirement/2013/01/24/401k-and-ira-withdrawal-options-for-early-retirees

brij2006 · April 2016

I have never heard of that.

We're pumping some extra dough into our mutual fund because we want to retire at 50 and 52. So we know our Roths and 401k isn't going to be the best options to pull from at that time.

smerka · April 2016

I am going to be 43 this year. The idea of retiring in 15ish years has no appeal to me. But I would be very careful and stay on top of the tax laws. It would not surprise me if Congress closes loopholes like this in the coming years

JoanE2012 · April 2016

Not gonna lie, I'd love to retire today if I could afford it! There are so many things I'd rather do than my current workplace.

lbonga1 · April 2016

I've heard of something called the Roth conversion pipeline. From what I understand, if you convert the money into a Roth, after 5 years you can withdraw without penalty. So I guess you would start it 5 years before you plan to retire. Maybe it only works if you're going from a traditional IRA to a Roth IRA though. I think @hoffse might know more about it.

smerka · April 2016

You can take contributions to a Roth out without penalty after five years. I do not know if recharacterization counts the same as regular contributions.

hoffse · April 2016

Yeah this is possible, but it's an exception to the rule, and I would not suggest planning to structure your retirement to take advantage of this option if you have time to fund other accounts. Frankly, 4 1/2 years isn't very long to wait until you are eligible for normal withdawals.

You can actually take money from the account before age 55 if you are severed from your employer and you follow the "substantially equal periodic payment" (SEPP) rules, but they are complicated and stupid. You have to stick to certain withdrawal tables, and you might run out of money by doing that. In a nutshell, the SEPP rules tend to tie your hands with respect to how much you are required to withdraw (regardless of your actual needs), and that can affect the growth potential for the entire account.

You can't usually convert a 401(k) to a Roth IRA unless you are leaving employment (though you can sometimes convert to a Roth 401(k) within the plan, but your plan has to permit it). When you convert to a Roth, you pay taxes at that time.

And PPs make a good point regarding changes in the law.

With decades to prepare, just sock money away in a normal investment account if you think you want to retire early, or do what @short+sassy is doing and start building other active income streams. Then you can work or not, withdraw the money or not, and you don't pigeonhole yourself or risk depleting your 401(k) too quickly.

Using 401K before 59 1/2

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