How to access retirement accounts before age 59 1/2

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 Q. I’m 48, and I’d love to retire at 55. Or at least stop working full-time. The biggest problem I have is that almost all my savings are in retirement accounts, which I know I can’t access without a penalty before age 59 1/2. Should I stop my 401(k) and save in regular mutual funds instead?

A. Congrats on your plans for an early retirement.

There are options to access your retirement savings before age 59 1/2, but first, should you actually stop working that early?

“I always caution someone against retiring too early,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “If you retire at 55, you need to fund on average for around 30 years. That requires a lot of money.”

You certainly don’t have to have to go back to work when you’re in your 70s or 80s, so make sure your savings will be enough to carry you through.

You didn’t say if all your money is pre-tax accounts or if you have funds in an after-tax Roth account, and Lynch said it’s important to start diversifying your future income from a tax standpoint, especially if your savings are all pre-tax.

“If all your money is pretax, and the tax rates are increased, you really have only two options: pay more in taxes and live on less or take out more and risk running out of money,” he said.

Lynch said the ideal situation would be for you to have three different buckets of money: Pre-tax, tax-free and income on which you’d have to pay capital gains tax.

“Pre-tax works to a certain extent as the tax system is tiered and you defer money in a higher tax bracket and hopefully pull it out in a lower bracket,” he said. “Tax-free is good as you can take it out generally with no taxes.”

An example of tax-free money is if you sell a primary residence, you can have a tax-free gain of $250,000 for singles and $500,000 for those married filing jointly. Other options are municipal bond investments or and return of principal, such as money you have in the bank.

“In the capital gains category are investments that you owned that are not in a tax-deferred account and are either tax-free, or taxed at 15 or 20 percent, depending on your tax bracket,” Lynch said. “Having these three options in retirement can really help you control your taxes in retirement and have more money.”

So you may want to consider some different savings options now so you have more income options down the road.

If you’re unable to do that, there are still some ways to tap your retirement accounts without penalty.

“If you are terminated — retire, quit or are fired — from your employer after age 55 but before age 59 ½, you are allowed to withdraw money from your 401(k) penalty-free,” said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

That’s called the “Rule of 55.”

Your other option is known as taking “Substantially Equal Periodic Payments,” or Rule 72(t).

In this scenario, anyone with a 401(k) or IRA, regardless of age, may take distributions that are “substantially equal” payments based upon your life expectancy, Power said.

“Once the distributions begin, they must continue for a period of five years or until you reach age 59 ½, whichever is longest,” he said. “Your accountant can help you figure out what these payments need to be to qualify for this exception.”

Power said you should look at what tax bracket you think you’ll be in after you retire.

If you will be in a lower tax bracket, continuing to save into your 401(k) with pre-tax dollars while you’re in a higher tax bracket now, later taking distributions in a lower tax bracket when you retire, is the perfect scenario, Power said.

If you will be in the same tax bracket or higher, than the pre-tax savings isn’t as attractive and saving into a “taxable” investment account to build more liquidity could make sense, he said.

Good luck!

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This story was first posted in April 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.