Are you one of the millions of Americans hoping to retire early? Many people not only want to retire—they want to do so while they’re still young enough to be active and to enjoy some of their biggest goals in life. With focus, discipline and detailed planning, you can make it happen.

Even if you don’t plan on retiring early, it still makes sense to consider the possibility. Many retirees are forced to retire earlier than they would like because of medical issues or job loss. If this happens to you, a contingency plan could help you better manage the situation.

It’s difficult enough to accumulate assets to fund a normal retirement, but it’s even harder to save when you retire early. An early retirement means fewer years to save and more years of spending that have to be funded with your own assets.

Even if you do accumulate enough savings to fund an early retirement, however, you could run into another obstacle. Many Americans use tax-deferred accounts such as IRAs or 401(k) plans to save for retirement. These accounts let you defer taxes on your growth until you take distributions. The catch is that you must wait until age 59½ to take withdrawals. Otherwise, you may face a 10 percent early distribution penalty, which can be problematic for early retirees.

The good news is there are strategies you can implement to generate early retirement income without facing the 10 percent penalty. Below are a few ideas to consider:

72(t) Distributions

The IRS understands that there may be situations in which you have no choice but to take distributions from tax-deferred accounts before age 59½. These distributions can be accommodated through a rule called 72(t), also known as the rule of “substantially equal payments.”

Under this rule, you are allowed to take distributions from your qualified account before age 59½ without paying the 10 percent penalty. However, you must take the payments every year for the greater of five years or until you reach age 59½.

Also, the withdrawal amount is locked in. There’s no flexibility to change the withdrawal schedule once the payments begin. If you do deviate from the 72(t) schedule, you could face back penalties for all previous distributions.

Roth Contribution Withdrawals

A Roth IRA is a qualified account, but its tax treatment differs slightly from that of a traditional IRA. In a Roth, you don’t receive deductions for upfront contributions, as is the case in a traditional IRA. Instead, your contributions are made with after-tax money.

Since you don’t receive any favorable tax treatment for your contributions, you are always allowed to withdraw those contribution dollars without facing taxes or penalties. That’s true even if you are not yet 59½.

If much of your funds are in a traditional IRA, you may want to consider a Roth conversion. It’s a process in which you move your funds from a traditional IRA to a Roth. You have to pay taxes on the converted amount, but it could be worth it to obtain tax-free income in the future.

Taxable Accounts

Finally, there’s nothing saying you have to use qualified accounts only to save for retirement. You can avoid the early distribution penalty altogether by saving some portion of your assets in a taxable account. This could be a particularly good idea if you think early retirement is a possibility for you.

Ready to create your early retirement strategy? Let’s talk about it. Contact us today at Intelliplan Financial. We can help you analyze your needs and goals, and then develop a plan. Let’s connect soon and start the conversation.

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