Considering Early Retirement?
Here are two options that can make that a reality.
The Rule of 55
If you have a 401(k) plan, you probably already know that there is usually a 10-percent penalty for withdrawing any of the funds before you reach age 59 1/2. But there are some exceptions to this early distribution rule and one of them affects pre-retirees in particular. It is often referred to as the Internal Revenue Service's "Rule of 55." If you are age 55 or older, it is something you should know about because it affects how and when you can gain penalty-free access to your retirement savings.
Of course, there is a slight catch you need to be aware of. The Rule of 55 only applies to assets in your current 401(k) or 403(b)—the one you invested in while you were at the job you are considering leaving at age 55 or older. If you have money in a former 401(k) or 403(b), it's not eligible for the early withdrawal penalty exemption. You would have to wait until age 59 1/2 to begin withdrawing funds from those accounts if you wanted to do so without paying the 10-percent penalty. One strategy to give yourself access to retirement plan assets with a former employer prior to age 59 1/2 is to roll those assets into your current 401k prior to retiring from your current job.
***It is important to note that the Rule of 55 does not apply to individual retirement accounts (IRA). If you were to move assets into a rollover IRA upon leaving your job, you would not be eligible for early withdrawal under the Rule of 55.
If you are looking for more information on this retirement planning strategy, IRS Publication 575 provides additional guidance related to the "Rule of 55".
A Section 72(t) Distribution
The Rule of 55 is not the only way to take penalty-free distributions from a Retirement Account. There's another way to take money out of a 401(k), 403(b), and even IRA retirement assets if you leave a job before the age of 59 1/2. It's known as the Substantially Equal Periodic Payment or SEPP exemption aka the IRS Section 72(t) distribution.
Using this type of distribution rule, you would start by calculating your life expectancy and use that to calculate substantially equal payments from a retirement plan for at least five years in a row or until the age of 59 1/2 depending on which is longer. The distributions can occur at any age and they're not bound by the same age 55 threshold as the Rule of 55.
The 72(t) distribution can be complicated, but we can help you figure out if it's an option for you.
For more help with your early retirement, please contact 80/20 Financial Services. We charge nothing for a second opinion.
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