Yellowstone Financial, Inc.

Accessing Your Retirement Money Early

If you wait until your 60s to retire, accessing your retirement savings is a straightforward proposition.  You can tap your Traditional IRA, Roth IRA, taxable investment accounts, and most work retirement plans without penalty.  But what if you need funds sooner than that?

First, I should say we won’t consider whether you should access retirement funds early because that’s an entirely different question.  It may very well be damaging to your financial future.  Let’s assume it is a good idea because you’ve amassed enough wealth to retire “early.” It’s important to consider your different investment accounts and map them to different stages in your financially independent life.  Sure there are many rules to keep in mind, but also back doors you can use to your advantage.

Funds Available at Any Age.  There are some accounts that have no age requirements for taking the funds out penalty-free.  Most investors know they can withdraw funds from a taxable investment account at any time.  You just need to pay capital gains tax on an investment you cash out if it has gone up in value since you purchased it.

Fewer people realize that you can access your Roth IRA contributions at any age without penalty.  You can also access Roth IRA conversions (which means it was moved from a traditional IRA or other pre-tax retirement account) after a five-year waiting period for that specific conversion without penalty.  Earnings in a Roth IRA are best taken once you turn 59 ½ or meet one of the exceptions.

Most investors don’t realize that you can access Traditional IRA funds without penalty regardless of your age, as long as you follow the rules.  There are exceptions for higher education, medical expenses, and first-time home buyers.  Beyond those, you can elect to withdraw substantially equal periodic payments from your IRA without penalty.

Let’s say you’re 50.  You could take an IRA distribution of roughly 4 percent of a particular IRA.  While those distributions are taxable (just like any pre-tax IRA distribution), there’s no penalty involved.  Key to this approach is that you need to keep these payments going for at least five years or until you turn 59 ½, whichever occurs later.  These rules as well as the Roth ones have enough pitfalls that consulting a tax or investment professional on this topic is a good idea.

Borrowing from your 401(k) or 403(b) is usually harmful to your financial health, but can be done at any age subject to plan rules.  You usually can borrow up to half the balance or $50,000, whichever is less.  You must repay the loan over five years (with longer periods available for those purchasing a home).   That borrowed money is no longer invested and just earns what paltry interest you pay it.  If you leave your employer while that loan is outstanding, you may have to pay it back in one lump sum.  Otherwise it’s subject to ordinary income tax and penalties.

Once You Leave Your Employer.  Many 401(k) and 403(b) retirement plans allow you to begin distributions if you leave that employer in or after the year you turn 55.  Again these distributions are generally taxable, but you escape the 10 percent penalty.

One of the benefits of working for state and local governments and some non-profits is access to a 457 retirement plan.  If you are fortunate enough to be a prodigious saver and your work offers a 457 plan, you may be able to contribute $18,000 or more annually in addition to your regular retirement plan contribution.  Once you leave that employer, you can take plan distributions at any time regardless of age without penalty, although they are taxable.

Extra Credit.  There are other methods we haven’t covered here such as borrowing or taking partial withdrawals from cash value life insurance policies.  Non-qualified deferred compensation plans have their own set of rules.  Non-qualified variable annuity plans can be cashed in without IRS penalties if your balance has gone down in value from when you originally bought them including exchanges.

Once you have passed the 59 ½ year old milestone, few of these tricks are needed any more.  You can take distributions from Roth IRA earnings, Traditional IRAs, retirement plans, annuities, and most other plans without tax penalty.  If you need funds earlier than that, consider all of the options available to you because you may be able to avoid a penalty.