“An ounce of prevention is worth a pound of cure.”
Jeff Bezos talks about decisions as either one-way doors or two-way doors. One way means that you can’t back out. Two-way doors, you can.
I also like the way Tim Ferris talks about decisions. They are either hats, haircuts, or tattoos. You can change a hat easily. Haircuts take some time. Tattoos are practically permanent, and very painful to change.
Today, we are going to review six ways you can access your retirement accounts before age 59.5.
First is with a 10% penalty on IRA accounts. So you want to try to avoid this one. This is an expensive haircut.
Second, Roth contributions. You can take out your Roth contributions tax-free and penalty-free. If you contributed $7,000 to a ROTH IRA each year for 10 years, you now have $70,000 you can pull from. You will need to leave your earnings in that account. I am still going to say this is a haircut because this is very valuable money. It can grow TAX-FREE for as long as you keep it in that account.
Third, Roth Conversions. You can transfer money from a traditional IRA to a Roth IRA through a Roth Conversion. This is a powerful tax planning strategy. You can take your conversion amount out without penalty or taxes if you did that conversion over 5 years ago. This will satisfy the 5-year rule. If you don’t have a Roth IRA, you may want to start one, even if it is small. This will start the 5-year clock.
This is a haircut. Roth money should be left to compound.
Fourth, 72-t distributions. This rule allows you to take penalty-free withdrawals as long as they are “substantially equal periodic payments.” You MUST take them for 5 years OR to age 59.5, whichever is longer. This is a tattoo. You can’t reverse this decision.
Fifth, The Rule of 55. If you leave your job in or after the year you turn 55 (or 50 for public safety workers), you can withdraw funds from your current employer’s retirement plan without the usual 10% early withdrawal penalty. You’ll still owe income tax as usual, but that extra penalty disappears.
However, there are a few important caveats:
- This only applies to your most recent employer’s plan—not old 401(k)s or IRAs.
- Your employer must allow early withdrawals (some require lump sums, which could bump you into a higher tax bracket).
- You must leave your job first (Returning to work later is still an option though.)
I would categorize this as a hat.
Sixth, Health Savings Account. You can withdraw money from your HSA tax-free and penalty-free for medical expenses. 91% of people are NOT using HSAs correctly to maximize their potential. Read more about it here. This is a haircut, because HSAs are like a Roth IRA.
Here are other ways you can withdraw from retirement accounts:
- Death
- Disability
- First-time home purchase- (but there are limits)
- Medical expenses above a certain threshold
- Birth or adoption
HOWEVER, if you have an overall financial plan in place, you should NOT need to do any of these!
Why?
- You have adequate savings/emergency fund
- You may also have a brokerage account to withdraw from
- And You may have lines of credit available
Check out our latest video: 5 Things You NEED To Know BEFORE You Retire
