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You save your money consistently.
You invest your money wisely.
You’re doing everything right just the way you’re supposed to when it comes to retirement.
Why? Because you know you want to build a nice nest egg for yourself sooner rather than later. You’d like to enjoy your life the way you want to rather than be forced to work for the rest of your days.
So if that’s the case, are you going to let anyone tell you when you can or can’t retire? Absolutely not!
But wait! The IRS says that the official 401k retirement age is 59-1/2. That’s the age when you finally get full access to your savings. Otherwise you’ll have to pay a hefty 10% penalty on the money you withdraw.
So does that mean that the place where most of us working Americans are saving the majority of our money is totally off limits until we’re nearly 60 years old?
Not at all…
Why the 401k Retirement Age Doesn’t Have to Hold You Back:
Dealing with that 59-1/2 age requirement was exactly the challenge I faced several years ago when I first started really thinking about my own retirement plans.
My grand plan is, of course, to reach financial freedom and obtain early retirement. Right now my target is to achieve this by my 40’s.
But the problem I faced was how to I “bridge” those years between when I want to retire and when I can actually start having access to my money?
Fortunately, I’m not the first person to try to attempt this. If you’re that ambitious enough to save that diligently, then there are plenty of loop holes and strategies to help work around this age restriction. Here are a few of them I’d like to share with you:
1) Leave Work at Age 55:
If it’s only 4 years or less you’re looking to gain on the 401k retirement age, then you’re already covered by a little known exception from the IRS. According to their rules, you can take penalty free 401k withdraws if you leave your job at age 55 or later as follows:
Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances: Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
2) Use a Roth IRA:
Another useful strategy you can use to bridge that gap between when you want to retire and when you’re allowed to is to use retirement accounts that have different tax rules. This is where the differences between a 401k vs IRA can be very helpful; especially when it comes to using a Roth IRA.
Unlike a traditional 401k, a Roth IRA does allow you access your contributions five years after you’ve invested them. So depending on how much money you’ve contributed over the years, you could potentially withdraw a percentage of those contributions to help aid in holding you over for the next 5 to 10 years before you finally reach age 59-1/2 and can access your other savings funds.
3) Take a 72T Distribution.
Let’s say you’ve done all your early retirement calculations and your plan calls for absolutely needing to access your 401k funds early.
This is not a problem. Fortunately there is another little known loop-hole that allows you to make withdraws penalty free. It’s called an SEPP (series of equal periodic payments) or 72t distribution.
In order to use this strategy, you need to:
1) Quit your job where the 401k is.
2) Roll over your 401k into an IRA. Before you do this, check with both your old and new financial institutions to be certain that there aren’t any big fees or costs involved with the transition.
3) Consult an account on which of the three 72t distribution amounts you can take and file on your income taxes.
The most important thing with this strategy: Make sure that if you use it that it DOESN’T drain your finances too early! That would be devastating to the very thing you’re trying to achieve – financial freedom.
4) Save Outside Your Retirement Funds:
Investing in your traditional brokerage account is always an option. Even though you won’t get the same tax-sheltered benefits, you do get complete and total access to your money whenever you want.
Similar to using a Roth IRA, investing a little bit of money in high quality dividend stocks or income producing mutual funds can be a nice way to produce income in years leading up to when you can access the rest of your savings.
Are you going to be bound by the 401k retirement age of 59-1/2, or are you going to choose your own time to reach financial freedom? How will you bridge those years leading up to age 59-1/2?
Author Bio: This post was a guest contribution from MyMoneyDesign.com, a blog that is completely devoted to building strategies for maximizing your wealth and personal well-being.
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Good breakdown MMD! Many do not realize point #1 and have seen it throw investors for a bit of a loop. We’re not certain yet in terms of our age target as a lot of that is going to depend on the trajectory of our business and where it goes in the next couple of years. That said, we’re diversifying as much as we can, especially from a tax perspective, to enable ourselves to have some options to consider.
FrugalRules What’s great about your situation is that even if you retire you two could continue to work at your self-employed business and take in income for as long as you wanted to. That’s what I plan to do after I retire – work on whatever I want and still continue to bring in an income; just not in the traditional sense.
Nice overview. Plenty of ways to get at your money before 59.5. You just have to know the rules.
Matt @ Mom and Dad Money I’ve spend quote a bit of time getting to know those rules and loop-holes! I used to think that the age 59-1/2 rule was going to keep me from doing what I wanted. Good thing I found out I was wrong!
Thanks for sharing different strategies! I advise my clients to use a number of vehicles for saving when it comes to retirement so they are not limited to the restrictions of the government.
blonde_finance That’s solid advice. I can for sure advocate diversifying your retirement savings strategies. That way no matter what happens you’ll have coverage.
Thanks for the info! As we have begun thinking more about the fact that we would like to achieve financial independence and possibly retire early, we have been thinking more and more about the fact that we will need access to our money prior to age 59.5 years. I hadn’t heard of the third option and I was previously kind of fuzzy on the first. Thanks!
colormefrugal No problem! I hope you look into it deeper and learn how to use that strategy to your benefit.
This is a helpful list! A lot of people aren’t aware of option 3. Right now I’m trying to save enough in a taxable account to take me to age 59 1/2, but the SEPP will be an option for me too.
Great advice. As someone who is thinking more and more about early retirement, I didn’t really know how I would bridge the years outside of a taxable account or withdrawing principle from my Roth IRA. Thanks for sharing!
While not all employers offer their employees a 401(k), and certainly not one with matching contributions, it is a good option if you are eligible for one. If you aren’t eligible for one, then probably looking into at least an IRA is a good option. You can also rollover an old 401(k) into an IRA. Learn more about these kinds of programs at http://www.mutualfundstore.com/401k.