How To Early Retirement At Age 55
By Jeremy Reif, CRPS
Are you dreaming of an early retirement? This is not about 59 ½. How about earlier, at age 55? Let this be the introduction to some strategies that can help you unlock the door to financial freedom. Retire at age 55 without facing those pesky 10% penalties. This article will dive into three different options to get you to retirement earlier than you perhaps thought.
To get to these ideas, first thing, let’s talk about the power of compounding investing like inside a 401k account. This is done by systematically contributing to your 401k throughout your career and you’re taking advantage of tax-deferred growth. It’s like giving your retirement savings a boost. The idea is to save, save, save, and save some more. Now here comes the exciting part, the penalty-free exit. Typically, you can’t access those 401k funds penalty-free until you reach the age of 59 1/2.
Employee retirement age
Here’s a little-known exception that could change everything. Employee retirement age is different than the widely recognized early retirement age of age 59 ½. If you retire or leave your job at the age of 55 or older, you can tap into your 401k without that 10% penalty. That means you can start enjoying your hard-earned savings even earlier. Sometimes, people work at several companies throughout their careers and if the money has been rolled to the 401k plan prior to retirement, this 401k money can be made available as well.
There’s a catch. You must have left your job after turning 55. So, if you retire or leave at 54, you’ll still face that early withdrawal penalty. Keep this in mind as you plan your exit strategy.
IRS Tax Code 72(T)
Say you leave or were let go prior to age 55. There is a different tax code like the age 55 rule, but that has more rules and regulations than the age 55 retirement from an employer. This does allow for access to your retirement account prior to age 59 ½. This covers all retirement plans instead of only an employer-sponsored retirement plan. This covers IRAs as well. This route has strict rules called Substantially Equal Periodic Payments (SoSEPP). This option is an option, but usually, it is used when all other options are exhausted.
Roth Conversions
This is normally not discussed in the idea of early retirement. This is a new way to think about Roth conversions but is as equally another fantastic option. This option is best if used earlier rather than later and should be considered if you’re in your forties or early fifties and planning for early retirement. This strategy could become a game changer. Here’s how it works. You convert a portion of your 401k to a Roth IRA each and every year, by spreading out these conversions over several years, you can minimize tax implementations. Here is the catch, you can get penalty-free access to your funds after five years.
Whether you’re eyeing that tropical beach or dreaming of pursuing your passion, unlocking your 401k can help you achieve that early retirement dream. Remember it’s all about strategic planning and putting those retirement dollars to work.
What is the next logical step after planning out early retirement and where your income will come from during early retirement? Usually, it is figuring out health insurance through the open market to bridge the gap until Medicare age 65. Check out a short video below and stay tuned for a more detailed article.
We’re here to help you achieve financial freedom and retire on your own terms. Stay tuned for more tips and tricks.
References:
https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments