I've been on pace to have more than enough money saved to retire early, but nearly all of it is tied up in Roth & 401k balances, so I'm trying to think about ways to have some gap money until 59-1/2, if that's what I decide to go for. Not set on retiring early, just want to have options by the time I get there.

Currently - Mid-thirties:
- Max HSA
- 10% to Roth 401k
- 8% match from company (only need to contribute 6% to maximize match).
- Max joint Roth IRA ($12k/yr)
- Some margin goes to taxable investing, but we often use this to save for big-ticket items.

So the principle from the Roth IRAs is accessible penalty-free, which makes for a decent chunk of change pre-59-1/2, but ideally, I'd like to have access to more wealth. Really considering reducing our Roth 401k to the match minimum (6%), and throwing the 4% in a taxable investing account. Running the numbers, the impact to our 401k balance is honestly pretty insignificant.

I understand the trade-off, losing some tax savings for access to money, but it sure does open some options up, and provides access to wealth for unplanned opportunities to invest in other income-producing assets like real-estate. Any thoughts? Any other options folks have leveraged in a similar boat?

TIA

Isn't the growth of the Roth IRAs tax-free as well? Not just the principle?

Edit: Oh I see you are referencing retiring early and refering to not being able to pull from the growth of the Roth IRAs. Nevermind.

hypeiv said:

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Once you retire early and your taxable income goes way down that would be a good time to roll your 401k into a traditional IRA and start roth converting it. You can get to the money you convert 5 years after you do the conversation so between reimbursing yourself from the HSA, taking out the contributions from your Roth, and your post tax account would only need to bridge you for 5 years. Also if you can make it to 55 you can pull money from your 401k that is with the employer you retired from.

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This is the way.

RockOn said:

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hypeiv said:

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Once you retire early and your taxable income goes way down that would be a good time to roll your 401k into a traditional IRA and start roth converting it. You can get to the money you convert 5 years after you do the conversation so between reimbursing yourself from the HSA, taking out the contributions from your Roth, and your post tax account would only need to bridge you for 5 years. Also if you can make it to 55 you can pull money from your 401k that is with the employer you retired from.

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This is the way.

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End of thread. You just need to gap 5 years and season the ladder.

hypeiv said:

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Once you retire early and your taxable income goes way down that would be a good time to roll your 401k into a traditional IRA and start roth converting it. You can get to the money you convert 5 years after you do the conversation so between reimbursing yourself from the HSA, taking out the contributions from your Roth, and your post tax account would only need to bridge you for 5 years. Also if you can make it to 55 you can pull money from your 401k that is with the employer you retired from.

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This is good info and some great tax advice for the Roth conversion. Wasn't aware of being able to pull from the 401k at 55, though reading online indicates that is not allowed by all employers, and you have to do it in the year you turn 55 (though you could return to work after leaving). So some small risks there, but a great option to gain access to some wealth.

I'm still thinking reducing the Roth 401k to the minimum in favor of some taxable investing is a good thing to consider - namely, gives some additional access if retiring before 55, and opportunities to use wealth for other investments.

Thanks!

ETA - Who knows what rules will change in 20 years - could make this all easier or harder either way.

Like the above strategy but I wish I had put more in a taxable account starting earlier in life. I'm 48 so hard to make that up but we've done an ok job in last five years catching up on that.

I just went back to work though so plan to sock away as much as I can while I can ahead of and through the global apocalypse.

BenTheGoodAg said:

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hypeiv said:

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Once you retire early and your taxable income goes way down that would be a good time to roll your 401k into a traditional IRA and start roth converting it. You can get to the money you convert 5 years after you do the conversation so between reimbursing yourself from the HSA, taking out the contributions from your Roth, and your post tax account would only need to bridge you for 5 years. Also if you can make it to 55 you can pull money from your 401k that is with the employer you retired from.

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This is good info and some great tax advice for the Roth conversion. Wasn't aware of being able to pull from the 401k at 55, though reading online indicates that is not allowed by all employers, and you have to do it in the year you turn 55 (though you could return to work after leaving). So some small risks there, but a great option to gain access to some wealth.

I'm still thinking reducing the Roth 401k to the minimum in favor of some taxable investing is a good thing to consider - namely, gives some additional access if retiring before 55, and opportunities to use wealth for other investments.

Thanks!

ETA - Who knows what rules will change in 20 years - could make this all easier or harder either way.

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I did this is is my mid 30s as well (only late 30s now). Ran the numbers and frankly dropping to minimum to keep company match at that point didn't move the peg all that much, especially going from 10% to 6%. It really drove home how important it was to fund the 401k early like I did. After a certain point, the compounding really takes over the growth.

I plan to utilize some of the other strategies above later on but have a nice base investing account to fall back on is a big deal to me as well.

hypeiv said:

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Once you retire early and your taxable income goes way down that would be a good time to roll your 401k into a traditional IRA and start roth converting it. You can get to the money you convert 5 years after you do the conversation so between reimbursing yourself from the HSA, taking out the contributions from your Roth, and your post tax account would only need to bridge you for 5 years. Also if you can make it to 55 you can pull money from your 401k that is with the employer you retired from.

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To clarify a few pieces:

Rolling the 401k to a trad and then converting is a good idea. You may not want to roll all of it if you plan to use the 401k at 55. It is true that some 401ks do not allow the 55 w/d, but most do. Also, I am pretty sure you can only do one distribution between 55-59.5, so plan accordingly.

As for Roth distributions, you can actually take any contribution and conversion amount anytime without penalty or tax. The 5 yr rule is on growth only, and the IRS allows you to specify what you pulled out.

For the most part, if you have enough money to retire early, it doesn't matter where the money is because there are ways to get to it without penalties.

There is also a 72t option for your trad IRA. It is basically monthly income from your trad IRA without penalty. It has some rules you have to adhere to. Also, the IRS limits the amount you can pull out per month. I would guess that $300k balance would allow you to pull out 1500-2000 per month if you were around 55. Someone could run that calculation for you though.

You likely know this, but your contributions to the Roth 401k are also free from penalties and can be used once you roll it into a Roth IRA. The 401k place keeps track of your contributions and will account for it in the rollover.

rabbott20 said:

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Isn't the growth of the Roth IRAs tax-free as well? Not just the principle?

Edit: Oh I see you are referencing retiring early and refering to not being able to pull from the growth of the Roth IRAs. Nevermind.

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doesn't the Roth IRA come with a maximum salary limit?

I was always told I could not qualify for Roth.

FIRE

Thanks! And between the match and IRA, it's more like going from 24% to 20%. I know you're right about the compounding taking over - feels like we're right on that precipice with our 401k.

Harkrider 93 said:

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You likely know this, but your contributions to the Roth 401k are also free from penalties and can be used once you roll it into a Roth IRA. The 401k place keeps track of your contributions and will account for it in the rollover.

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This little nugget is interesting, and I wasn't aware. I had read some conflicting information about pulling contributions from Roth 401ks. I think in hindsight, it didn't explain the rollover component well. I'll have to read more on this, but that could be a game-changer.

Ideally, your Roth accounts are the last ones you pull from. It doesn't always work out that way but the logic is simple. Tax-free compound growth forever, the more you draw early the more of that you're robbing your future self of.

LMCane said:

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rabbott20 said:

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Isn't the growth of the Roth IRAs tax-free as well? Not just the principle?

Edit: Oh I see you are referencing retiring early and refering to not being able to pull from the growth of the Roth IRAs. Nevermind.

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doesn't the Roth IRA come with a maximum salary limit?

I was always told I could not qualify for Roth.

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Here we go gif.

You can do a back door to get around the income limit assuming you are doing the standard annual contribution and haven't converted a 401k to a Roth and all that jazz.

You put money in your trad IRA first. Let it settle and then immediately transfer it to your Roth IRA. All of the major investment platforms should give you a transfer work flow to do this online.

I'll just add unless you have some goal you are retiring to, you will never retire early.

The math for working an extra year or two will always look better than retiring now. So unless you have a plan on what to do, you wont pull the trigger. Most of the people you see online who retired early and are super happy have basically just become self employed and earn income from their blog or youtube channel.

So in addition to planning how the finances will work out, you need to also plan what you will do in early retirement.

Roth contributions in any account are always tax free distributions.

The tax free growth is where the 5 year 59 half rule comes in.

I think I agree in spirit, but not 100%. I've always planned for 59-1/2, but am realizing there are just other things I'd rather do at that point in my life as I've watched my father and father-in-law take opportunities, but not without challenges due to how their retirements were tied up. So for me it's just taking steps to open up the options now.

At that point in my life, my kids will be out of the house, but who knows where they'll be and how many grandkids we'll have, etc. And I've got an idea of a few things I'd like to do at that point, but keep refining that plan and working towards it as I get older.

It sounds like you have already throught about what you want to do. I know someone who saved enough he didn't need to work anymore and hated his job so he retired early but had no plans. He didn't last 3 months before he found another job, but it was still a positive thing for his life because he found a job that he liked more but didn't have to worry it didn't pay as much as his old job.

So I absolutely think it's a great idea to save for FI but also think about the other half as well.

BenTheGoodAg said:

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I think I agree in spirit, but not 100%. I've always planned for 59-1/2, but am realizing there are just other things I'd rather do at that point in my life as I've watched my father and father-in-law take opportunities, but not without challenges due to how their retirements were tied up. So for me it's just taking steps to open up the options now.

At that point in my life, my kids will be out of the house, but who knows where they'll be and how many grandkids we'll have, etc. And I've got an idea of a few things I'd like to do at that point, but keep refining that plan and working towards it as I get older.

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Your other option (depending on what field you are in and your reputation) is to create an LLC and be an independent consultant and work as you see fit once you get to the point that you can take a flyer on that.

I left corporate two years ago and did just that at 46. I just took a new job at a startup last week full-time because it was a good opportunity and sounds fun but I did my own thing for that two years. Didn't make a ton of money but enough to cover some big expenditures here and there.

I agree and have seen enough people not know how to retire or die on the job. I consider myself a hard worker, but trying hard not to fall into either of those traps.

Good point. It'd be hard in my current company/industry (not due to reputation issues), but maybe in a broader industry and it's something I've considered. I'm sure it's easier than ever too with remote opportunities.

I honestly think it'd be fun to switch it up, too though. Think I'd be really content as a part time handyman. Someday that will be an element of the retirement plan.