When to retire is not an easy question to answer. Previously, many argued against retiring early, due to the financial penalty for doing so. However, a new IRS law will help those who want to retire early. That’s right! Read on to find out more…
New IRS Rule For Retirees
In the past, the biggest challenge for anyone who wanted to retire early was that one could not withdraw retirement savings until they were 59-and-a-half-years-old. Any withdraws from IRAs and 410(k) before this age previously resulted in a 10% tax penalty on each withdrawal. However, the IRS announced that those who leave the workforce before 59½ can take out more money each year without the 10% tax.
To do so, one must take “Substantially Equal Periodic Payments” (SEPPs). There are three options for SEPPs: minimum distribution, fixed annuitization, and fixed amortization. If you want the most bang-for-your-buck, fixed amortization is the way to go. The fixed amortization payment is determined via both your life expectancy and a nationally-set interest rate. Because of the recent rule change, the IRS’ interest floor rate for fixed amortization SEPPs is now 5%, resulting in much higher payments before 59½.
Still, while retiring early can sound great, many experts advise not rushing in…
Don’t Rush Into Early Retirement
Famed IRA and retirement expert Ed Slott discourages SEPP withdrawals. And he has a point: many things can go wrong with this retirement plan. First, while the payments avoid the 10% tax, they are still subject to regular income tax. Second, once you commit to these payments, there’s no going back.
“For example, if Mary at some point decides she doesn’t want these taxable payments, she has to take them until she reaches age 59½ – or suffer the 10% penalty on all her payments,” Slott explained. “While this sounds easy enough to live with, the reality is that over the years, it’s easy to make a mistake or miss a date. The result is a penalty on the whole transaction.
“In my mind, however, the biggest risk with SEPPs is that you’re committing to a strategy that may run out your retirement savings before you run out of oxygen,” Slott told MSN. “Just because you can now withdraw more each year doesn’t mean you can afford to draw that much. For example, if Mary withdraws $60,312 each year during the SEPP period, she will likely have depleted well over half of her $1 million retirement savings by the time she reaches age 60. She may live for decades longer, yet she will be starting her 60s with less than $500,000.”
So, if you want to retire early, proceed with caution and talk to an expert before following through.