See
http://www.irs.gov/pub/irs-irbs/irb02-42.pdf

and http://taxes.about.com/od/preparingyourtaxes/a/1040line59.htm

http://www.jennisondryden.com/view/page/jd/11654

ANYONE can take out money from their retirement accounts BEFORE 59.5 years and not have a penalty, IF they take it out according to the IRS actuarial tables for life expectancy.

So GO AHEAD and put it into the IRA or 401 (k), then withdraw it like an annuity, equal payments to you for your calculated life.

Yeah, this one annoys me too. I suspect it will go to 70 for the later Gen Xers and Gen Yers. But we do get to live longer. :) At least in theory.

I also agree with 1) that you should at least get the employer’s 401k match, 2) that a SEPP plan is decent concept for early retirees, and that 3) you should be as sure as you can that you actually have the funds to retire, even though market declines.

Another point to consider in a 401k is that some companies provide very low cost index funds. Some carry the institutional funds, which expense ratios below those of ETFs. Nice, if you can get it.

It sounds like they already have a lot outside of retirement accounts so I don’t see why they couldn’t use that money until 59.5 if they had to…or the Roth money if they decide to do it.

Trent/Beth – you are both correct but it’s good to know that you CAN put money back into the Roth if you take it out…IF you do it within 60 days. After 60 days it’s gone for good.

With regards to getting at your 401k money before 59.5, you can do so, without penalty, if you set up a SEPP plan. This stands for Substantially Equal Periodic Payment and it means that if you try to tap your money before 59.5 they will figure out what your life expectancy is and set up a plan that pays you an equal amount each year depending on what that expectancy is. You get that money just as you would with an of-age distribution and there are no early-withdrawal penalties but you have to do it for at least 5 years. Just something to keep in mind.

A 401k is great for most people because it comes out of their paycheck before they see the money. For people who are capable of saving on their own (and who may have the same or higher taxes at retirement) it might be better to save outside the 401k because then you’ll be paying the (currently lower) long term capital gains rate, rather than the income rate on the proceeds.

Another reason to have sheltered accounts is because many are protected from law suits and creditors. Not a bad idea in a sue happy society.

It would be a horrible idea to intentionally avoid your 401(k) just because you plan to retire early.

I have a few problems with Roth IRA’s. And maybe people can answer my concerns:

1) Why do Roth IRA’s have income limits? I know its high 156-166k a year and I’m not near that by any means. But if the rich can’t play in the field it smells like a subsidy to me and something that the government can do something to in the future. Plus, the limit on Roth IRA’s isn’t really going to be a dent for an investment vehicle for a high income wage earner…I’m leery on this.

2) Time value of money. Or, I’d rather have the dollar from you today than get it tomorrow. When I retire, I don’t plan on having an income…so what will be my tax then? I also plan not to have a mortgage, children expenses, car loan, etc.

It’s probably in my best interest to start up a Roth this year to diversify. But I just don’t see all of the benefits that the industry talks about and it seems like 401k’s (and other investments) are kind of put on the back burner. I’m interested to hear what others think on this.

Why not designate a single taxable account to cover 45 to 85? Because tax-efficient vehicles (401Ks, IRAs, Roth IRAs, HSAs) just blow taxable accounts out of the water. Not having to pay taxes on yearly distributions or realized gains is a huge factor over the long term. Just run the numbers a few times and you will see what kind of impact it is. 3 years of 10% tax-deferred growth cancels out the 10% early withdrawal penalty when compared to an investment that gets fully taxed every year. For more tax efficient asset types, the target for passing the 10% penalty is 7 years (high yield stocks/reits) to 17 years (large cap growth).

The key to finding a good planner is to ask for recommendations and then ask how he’s paid commission or fee.

Remember, government is an aspect of risk. Don’t keep a narrow view of risk being just up or downs of stocks, there are hundreds of other factors that can just screw up retirement plans. Plan on and evaluate as many as you can. In the case of taxes, just diversify across pretax plans (Traditional IRA, 401k) and post tax plans (Roth).

Although, from their description, it sounds like they don’t even have it invested, that it’s just sitting in savings (they only mention interest, not dividends or capital gains), which means they’re probably losing more money every year to inflation than they’re preserving in interest.

Chazzman also makes the very important point about company match on a 401K–if it’s available and you don’t take it, you’re just throwing away free money.

Cheers
David