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How to Retire Before 59.5


"I'm 28 and just paid cash for my first home.  I have about $30k in a Roth, $20k in a traditional IRA, and $65k in 401k.  I make about $60k/yr and co"ntribute 15% to the 401k with a 1% match, and will soon resume contributing to the IRA's.  My goal is to retire at 50, which is well before I can touch those accounts.  What’s the best pathway to get there?

Congrats on your ability to save and invest.  I hope you are able to accomplish your goal of retiring by 50.  It sounds as though you are doing a lot of the right things to get you there.  If I am interpreting your question correctly, I don’t think you are asking how to save enough to be able to retire by 50.  It seems as though you are already doing a great job in the saving and investing department.  I am assuming that you are wondering how you can retire at 50 if all of your investments are in qualified accounts or Roth IRA’s knowing that there is a penalty for withdrawing funds from those accounts prior to age 59.5.

The way I see it you have three options.  The first is to begin saving in taxable accounts as well as your retirement accounts.  The investments within taxable accounts can be liquidated at any time and would certainly be available at age 50.  You would have to pay tax on any capital gains that you would incur.  The drawback to this is that you do not receive the tax-deferred benefit of the retirement accounts.  For this reason I don’t think I would begin this strategy unless you are maxing out your retirement accounts.

The second option is to withdraw your principal from your Roth IRA investments.  There is never any tax or penalty for withdrawing your principal from your Roth IRA.  If you continue to max out your Roth IRA contributions, then you will have well over $100,000 worth of principal in your Roth IRA by the time you are 50.  Keep in mind that you lose all the potential tax free growth on this money that could be used during the later portion of your retirement as you draw down your other retirement accounts.  Losing this tax free growth is huge, and I wouldn’t recommend this strategy either.

The third option is to utilize a little known rule called a 72(t) distribution.  There is a way to tap your qualified retirement savings at age 50 without paying the 10% penalty.  Basically the IRS allows you to withdraw a set amount each year until you reach 59.5.  This amount can be determined based on your need using one of three calculations.  You would still have to pay the income tax on the withdrawn amount.  You would need to continue to make these withdrawals at the pre-specified amounts until age 59.5 (or at least five years if you start after age 54.5).  At that point, you can withdraw as much or little as you need until age 70.5.  I don’t know whether or not these withdrawals will be enough for you to live on at the time that you are 50.  That will be one of the many things for you to consider as you approach this decision.

Congrats again on your concentrated effort to save and live well within your means.  Regardless of whether you are able to retire by 50 or not, you are on the path to a healthy financial future.  Best of luck to you!