How Can You Generate Retirement Income Before Age 59½?
Filed under: Retirement
Do you hold a large portion of your retirement savings in qualified accounts such as 401(k) plans, IRAs or other tax-deferred vehicles? These accounts are useful for saving for retirement because they allow you to defer taxes on your growth until after you take distributions in retirement. That tax deferral could help your assets accumulate at a faster rate.
Of course, tax deferral doesn’t come without a catch. In most qualified accounts, you aren’t allowed to begin distributions until after age 59½. If you take a withdrawal before that age, you could face a 10 percent early distribution penalty.
The early distribution penalty could be a problem if you retire before age 59½. Even if you aren’t planning to retire early, it’s still possible you could be forced to leave your career before retirement age. For example, you could get laid off and decide to retire early. You might accept an early buyout from your employer. You could suffer a disability or other health emergency that forces you to leave your career early.
No matter the reason, early retirement always presents a few challenges. One of the biggest is generating income from your qualified plans without paying early distribution penalties. Fortunately, there are a few strategies to help you accomplish this objective. Below are four steps to consider to create income in the early years of your early retirement:
Early Penalty Waivers
Even if you’re under age 59½, you may be able to withdraw money from a qualified account without facing the penalty. The IRS offers penalty exceptions in certain circumstances. Your eligibility for these exceptions depends on the type of qualified plan and the reason for the distribution.
For example, exceptions are usually allowed for distributions related to disability. Your penalties could also be waived if you’re using the money to pay for higher education costs, home purchases or even medical bills.1 A financial professional can help you determine whether your distributions would be eligible for penalty exceptions.
Rule of 55
If you’re looking to take early distributions from a 401(k) plan, you could have another strategy available. It’s called the Rule of 55. It allows plan participants to take penalty-free distributions from a 401(k) plan if they separate from service from their employer in the year they turn 55 or later.
Keep in mind that this strategy applies only to the 401(k) plan for the employer from which you separate from service. For example, you couldn’t use this rule to take penalty-free distributions from an IRA or a 401(k) plan from another employer.
Roth IRA Contribution Withdrawals
Roth IRAs can provide some flexibility for those looking to take withdrawals before age 59½. Your contributions to a Roth IRA are made with after-tax dollars. That means you can always withdraw your Roth IRA contributions at any time and for any reason without facing taxes or penalties. The distribution of your contributions could slow growth in the account, but it’s one way to create early retirement income.
Life Insurance Loan Distributions
One unique strategy is to use life insurance cash value to create income. If you have a permanent life insurance policy that has a substantial amount of cash value, you may be able to use those funds to create income before age 59½.
You can start by taking tax-free loans from the life insurance policy. Technically, these distributions aren’t taxed because they represent a loan that has to be repaid. If you don’t repay the loan, the balance is deducted from the policy’s death benefit after you pass away.
Ready to plan a strategy for your early retirement income? Let’s talk about it. Contact us today at Ambrose Financial & Insurance Services. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
1https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16697 – 2017/5/23
