Retiring Early and Your Retirement Accounts

Your choices about the disposition of your assets and plans for long term care or end of life care are among the most personal and important decisions you will make during your lifetime. The decisions you make today can ensure that your long term needs are met while laying the foundation for the smooth (and cost effective) administration of your estate. There are many considerations in estate planning matters including, but by no means limited to: wealth preservation, meeting charitable goals, providing for blended families, ensuring long term medical care needs are met, and Medicaid planning. The purpose of our newsletter is to provide clients with practical information on issues that you or a loved one may face and to assist you in planning for the future. We hope that the topics are helpful and welcome feedback.

We have estate planning attorneys in North Adams and Pittsfield, Massachusetts and Bennington, Vermont who are ready to serve your legal needs. If you know someone who is in need of estate planning services, or who may benefit from the information in the newsletter, please feel free to forward this newsletter to them.

Retiring Early and Your Retirement Accounts

Retiring early requires a significant amount of planning and savings. The Social Security Administration suggests that Americans should plan to live 90 years — and plan to save enough to support themselves at 70-100% of the income they make now during this time. That means if you retired at 55, you would need enough savings to support yourself for at least 35 more years.

This can be tricky — especially if a significant amount of your retirement savings is locked up in qualified retirement accounts, such as 401(k)s and Individual Retirement Accounts (IRAs). Currently, the federal government imposes a 10% penalty if you choose to take withdrawals from your 401k or IRA before you have reached 59.5 years old. In addition to the penalty, you also will have to pay income taxes on the withdrawals.

However, if you want to begin dipping into your nest egg before reaching 60, there are some options available that will allow you to do so without paying the 10% early withdrawal penalty.

  • 401(k) - if you have a 401(k) and plan on stop working for your employer at age 55 or older, you may be able to get unrestricted access to your 401(k) funds without paying the early withdrawal penalty. But keep in mind that your employer must offer this option, you must keep working for your employer until you are at least 55 and you must keep your 401(k) with your employer after you have stopped working (i.e. you cannot roll it over into an IRA).
  • SEPP - if you have one or more IRAs, you may be able to take advantage of the SEPP (substantial equal periodic payments) option. In order to qualify, you must take SEPP payments for a period of five years or until you reach 59.5 years old - whichever comes first. Also, you must make at least one regular withdrawal every year during this time period. If you fail to do so or decide to stop taking SEPP, you will be assessed the 10% early withdrawal fee, which will be applied retroactively to the date you began taking the payments. Lastly, you have to wait until your SEPP period ends until you can begin taking unrestricted withdrawals from your IRA. If you are considering SEPP, it is important that you plan carefully plan so that its disadvantages do not outweigh its advantages for you.

If you want to retire early, it is important to understand the effect state and federal tax laws will have on any early withdrawals you make from your retirement accounts. For more information on planning an early retirement and maximizing the benefits from your qualified retirement plans, speak with an attorney in your area.

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