The Personal Finance Podcast - Retire at 50..Without Paying a Dime in Penalties or Taxes

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Starting point is 00:01:00 On this episode of the personal finance podcast, how to retire at 50 without paying a dime in penalties or taxes. And welcome to the personal finance podcast. I'm your host, Andrew, founder of mastermoney.com. And today on the personal finance podcast, we're going to be diving into how to retire early without paying a dime and penalties or taxes. If you guys have any questions, make sure to join the Mastermoney newsletter by going to mastermoney.com slash news.

Starting point is 00:01:48 newsletter and follow us on Spotify, Apple Podcasts, YouTube, or whatever podcast player, you love listening to this podcast on it. And if you want to help with the show, consider leaving a five star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Now, if you're thinking about retiring early, maybe you want to retire in your 40s, maybe you want to retire in your 50s, and there's a lot of listeners who want to pursue financial independence and retire early. And so if that is you, there is a massive problem that a lot of people, run into. And it is how do you actually access your money without having to pay taxes and penalties on those dollars, especially the money that we have contributed to our retirement accounts? Now, the truth is,

Starting point is 00:02:30 if you pull from the wrong account too early, you could lose 10% of your money instantly and face thousands in unexpected taxes. So we have to make sure that we are planning for this properly. And in this episode, that is the goal is to teach you how to do that. But if you understand the rules, you can build a rock solid strategy that funds your lifestyle before age 59 and a half. And this is without touching a dime in taxes or in penalties. So in this episode, we're going to talk through a number of different things. The number one account early retirees rely on to bridge the gap from age 50 to traditional retirement age so that they can actually get to those retirement accounts to a step-by-step

Starting point is 00:03:08 Roth IRA trick that creates a pipeline of tax-free money that you can start tapping just five years after you retire. We're also going to talk about how to legally access your 401k as early as age 55, and that is without penalties. We're also going to talk about a little known IRS rule that allows you to create steady, penalty-free IRA withdrawals in your 50s, but it comes with one big catch, which we'll talk about. And there's two overlooked accounts that we're going to talk through, which is Roth conversions and HSAs, and how they can be your secret to early retirement backup plans. And then finally, we're going to talk about how to layer these strategies together so that you

Starting point is 00:03:45 can create the perfect retirement plan if you want to retire early. Because retiring early isn't just about how much you've saved. It's about where you saved it and the plan you have in place to start pulling from these accounts. And so what I want most of you out there to do is you have this goal that you want to become financially independent. And I think that is absolutely amazing. Most people listen to this show, they want to have at least the option to retire early if they want to. If you don't want to work anymore in your 40s or 50s, you want to have that option. And so this episode is going to show you some of the options you have available to you, especially if you're contributing to your retirement accounts. Now, the reasons why we contribute to our retirement accounts

Starting point is 00:04:23 is multifold. But one of the big ones is we save so much on taxes. Well, what if we can still save that amount on taxes and be able to pull from those accounts early? That's what we're talking about in today's episode. So without further ado, let's get into it. All right. So the first one we're going to talk about is the easiest one overall. This is the least complicated to understand overall. And it's easy pickings. And so we're going to start with this one to get the ball rolling in this episode. And this is the taxable brokerage account. This is your early retirement bridge. Now, this may be something where we can set this up properly and it becomes the bridge that helps fill the gap until you can get to the traditional retirement age. But we'll talk about how to access

Starting point is 00:05:03 this accounts early too. So if you're serious about retiring before the age of 59 and a half, this is the single most important account that you need to understand. Because while you're 401k, your IRA and your HSA are powerful tools for retirement, they all have one thing in common is they could lock up your money depending on some of the rules and the parameters surrounding your financial situation. And so a taxable brokerage account does not lock up your money. Now, this is your bridge. This is the money that you can live on if you retire early and you want to just have free, flexible dollars that you can pull from. Now, why is this one of the cornerstones for early retirement? Why should a lot of people who are considering retiring early even think about opening a tax?

Starting point is 00:05:43 because yes, you could get taxed there. But let's talk about this. Number one is immediate access. So you can withdraw funds from a taxable brokerage account at any age and for any reason with no penalties. And so because of this, this is one of the most powerful things that early retirees can have, is you don't have to worry about, ooh, am I allowed to pull this money right now? Or do I have to file some complicated forms to be able to pull this money? No, you can go into your taxable brokerage account, sell some stocks or investments, and be able to pull those dollars from that account. Two, is you have full flexibility. So you decide when to sell, how much to withdraw, and what tax bracket you fall into. Three, is it has favorable tax treatment. Very favorable tax treatment,

Starting point is 00:06:24 in fact, because long-term capital gains and qualified dividends are taxed at either 0%, 15% or 20%, which is often far lower than ordinary income tax rates. And then you have income control. So by timing, sales and withdrawals in these taxable accounts, you can manage your income level year to year and potentially pay zero federal tax. Now, this is the flexibility where most people who are pursuing financial independence or if they want to retire early, they aim to build 10 to 15 years of living expenses in their brokerage account because this is going to help them bridge the gap to age 59 and a half so that then they can start to access some of these other retirement accounts as well. So what I want to do is as we're starting to talk through all of these different strategies that we're going to be diving into, I'm going to give you some example. So here's how this works in real life. So let's say you want to retire at the age of 50 and your annual spending is $60,000 per year. And then your goal is roughly $600,000 to $900,000 to $900,000 in your taxable brokerage account. What this is going to do is this is going to give you 10 to 15 years of income while your 401k and IRA continue to grow untouched. Now here's the beauty of it because you can,

Starting point is 00:07:34 often access this money with little to no tax bill. Now here's why. Long-term capital gains and qualified dividends are taxed separately from ordinary income. And in 2025, at the time I'm recording this episode, a couple who is married can earn up to $96,700 in capital gains and qualified dividends and pay zero percent tax on that income. Let me say that again for all of you people in the back. A couple can earn up to $96,750 and pay $0.00.000. And pay zero percent. percent tax on that income. That, my friends, right there, is extremely powerful. And if your retirement number or your yearly spend is lower than $96,700 per year, then you have just unlocked zero percent taxes on that money. Now, if you add in the standard deduction, here's the big caveat,

Starting point is 00:08:21 and we talked about this also in our episode with Katie Gatty from Money with Katie, is the standard deduction gets you an additional benefit. And so if you add in the standard deduction, which is $30,000 per year for couples, you can have up to $120,000,000,000,000, $76,700 of total income completely tax-free. And so this is something that's not talked about enough when it comes to a taxable brokerage account is you can access some of these dollars completely tax-free. And for a lot of folks out there, it is plenty of money to live on based on where you live. So if you live in a lower cost of living state or even an average cost of living state, then most likely this is going to help cover a lot of your costs when it

Starting point is 00:09:00 comes to retirement. And for some of you out there who want to retire early, maybe in your first couple of years of retirement, you spend a little less utilizing this strategy where you don't have to pay any taxes on this money. But if you think that you can live on $100,000 or $126,000 per year because you are married filing jointly, then this is something that should be very interesting to you. This means that you could pull in six figures from your brokerage account and still owe $0 in federal taxes. I mean, there's just nothing like that out there. Now, a common concern with the tax, taxable brokerage account is something called tax drag. So tax drag is the small amount in tax that you pay on dividends and capital gain distributions every single year. But if you invest this wisely,

Starting point is 00:09:40 then you will be able to avoid that. So this is why we love index funds in ETFs because index funds at ETFs have lower turnover ratios. And so because they have a lower turnover, meaning they're not buying and selling a bunch of investments like mutual funds are, that allows you to have a much more favorable tax position when you were investing in index funds in ETFs. And so we look at the turnover ratio a lot when I look at funds. So you'll see me talk through index funds and ETFs and how I evaluate them. I will look at the turnover ratio. And if it is above a 0.50, then I will most likely look deeper as to why that is. Usually index funds and ETFs have very low turnover ratios where you don't have to worry about this as much. But mutual funds are

Starting point is 00:10:21 going to be pretty high and you just want to make sure that you understand what is going on here. So let's say you compare 35 years of investing with $7,000 per year at an 8% rate of return in a Roth IRA versus a taxable account. So in a Roth IRA, you'd have $1.2 million in tax-free withdrawals if you invested that $7,000 per year. At a taxable account, if there was a 0.5% tax drag, then you would have $126,000 less if you had that tax track. And so it's really important to make sure that we understand that tax drag can't have an impact in a taxable account, but the taxable account is going to give you total access and flexibility. So similar funds, if they had a 0.5% tax drag, then you would be losing about $100,000 with that same exact example.

Starting point is 00:11:05 So we got to make sure that we understand how that works because it is a six-figure decision that we want to look at. Now, pro tips to maximize the strategy when it comes to utilizing a brokerage account. Number one is to automate your contributions into your brokerage account. Every single month, try to contribute some money into a brokerage account, especially if your goal is to retire in your late 40s or your 50s, then you want to make sure that you're automating contributions. The taxable account needs to be part of your share. strategy. You need to make sure that you have that and invest consistently there. So look at your Fidelity account, look at your Vanguard account, look at whatever you use,

Starting point is 00:11:37 Robin Hood or whatever else, look at those accounts and start to make sure that you were automating those contributions. Number two is to control your income. So you can sell strategically to stay within that 0% or 15% long-term capital gains bracket. And this is going to help you tremendously when it comes to costs of having a taxable brokerage account because you can have a lot of benefits there. And again, the more and more I'm looking at the taxable brokerage account, the more that the benefits are just adding up for early retirees. You got to, got to look at this kind of stuff. And if you can control that income, really powerful stuff. Three is use tax efficient funds in these taxable brokerage accounts. Index funds, ETFs, those are my favorite

Starting point is 00:12:13 to invest in in a taxable brokerage account because they have those lower turnover ratios. They are much more tax efficient than some of the mutual funds out there or other funds that you could be investing in. And so the bottom line here is I want you to understand the taxable account is the foundation for early retirees. This is going to help you bridge that gap. And if you can have a goal of 10 to 15 times your income, you're going to have zero issues if you retire at 50. But even if you have less, it can help you bridge that gap because you do have compound interest and you have compound growth. But if the market does have a pullback, we just want to have an extra cushion. So it is a nice to have to have 10 to 15 times your income

Starting point is 00:12:48 in that tax or brokerage account to help you bridge that gap. If you can't get there, there are other options that we're going to talk about here in a second. And we will talk about how to layer out these strategies so that you can utilize multiple strategies at once. And so this is something that's going to be really, really powerful. Now, let's get into number two. So now I want to talk about the Roth conversion ladder. This is the five-year pipeline that gets you to tax-free income. And I want to talk about this because it is one of the most powerful methods for early retirees

Starting point is 00:13:17 to find ways to get money into a Roth so that they can utilize those contributions. Now, this is a strategy that lets you legally unlock money from, your 401k or your traditional IRA years before 59 and a half and walk away with zero penalties and zero taxes if you play your cards right. Now, most people never use it because they think retirement accounts are untouchable until they're in their 60s. But the wealthy know that this IRS approved move changes literally everything. And so let's go into this. Here's how the Roth conversion ladder works. One is you convert money. So you're going to move money from a traditional IRA or traditional 401k into a Roth IRA. Very important to know the distinction between the two. It's traditional to Roth. Or you can move it

Starting point is 00:14:01 from your 401k as well. Number two is you're going to pay taxes now. So obviously, when you are in a traditional 401k or a traditional IRA, you get a pre-tax deduction there so you do not have to pay taxes on those dollars. The IRS is always going to want taxes on your income when it comes to moving money from retirement account. Uncle Sam's always going to want his money. And so we got to make sure that when we move that money over, the traditional 401k or traditional IRA to the Roth IRA, we pay taxes in that given year. Then what you're going to do is you're going to wait five years. Now, there is something called the five year rule, which means if you wait five years, the converted amount becomes tax and penalty free.

Starting point is 00:14:39 And then you repeat this every single year. So each conversion is going to restart and have its own five year clock. And so every single year, when you move that money over, you restart that five year clock, creating this ladder of withdrawals. Okay? Now, this is completely legal. it is IRS approved and one of the most powerful early retirement account tools that exist. Now, here's why this is so powerful for early retirees, because when you retire early,

Starting point is 00:15:02 your income is going to drop. And so because you're in to come drops, often dramatically, there's an opportunity because now you can convert to this money during a time when you're in a lower tax bracket. So if you start to do this in your working years, you're going to pay higher taxes on that money if you start to convert to money. But maybe, for example, you know that over the course of the next five years, you are going to decide to retire early and you have a plan in place. But if you're making a really high income, then you're going to have to pay higher taxes on that money based on your income. Now, here's why this is a big deal, because the traditional IRA is tax later.

Starting point is 00:15:34 The Roth IRA is going to be tax never buckets at rock bottom tax rates. Now, this is one of the things that I think most people can shift. Sometimes they're shifting this money from 0% tax rates to 10% tax rates. And so it's really, really low in comparison of what your income tax currently is. Secondly, is you're reducing future required minimum distribution. So because you're pulling out of these pre-tax accounts, your 401k or your traditional IRA, you will not have RMDs later on down the line because you're moving this money into a Roth IRA. Roth IRAs do not have required minimum distributions.

Starting point is 00:16:06 Now, if you don't know what a required minimum distribution is, it is the IRS saying to you, hey, by the time you turned age 73, if you have a traditional IRA or a 401K, we want you to start pulling money out of those accounts so that you pay taxes on those dollars. You've got to pay taxes at some given time. And so we want you to start pulling that money out. and they're forcing you to pull money out. Well, this can impact a number of different things, including Social Security and the amount that you're going to get. And so you've got to make sure that you do this strategically, and this is going to help that, where you're going to have no

Starting point is 00:16:34 required minimum distributions if you start to move that money over to the Roth. And then three, is you're building a rolling steam of tax-free income that you can access before 59.5. So I just love getting more money in the Roth, especially as you get closer to retirement. It makes things a little more predictable, and you can pull money out when you want to instead of being forced to later on down the line. Now, this isn't theory. This isn't something that a lot of people think about. This is exactly how fire veterans fund decades of early retirement without even touching the principle. So I'm going to give you a real world example of how this could work out. And let's think about this. So let's say you're at 45 and you want to retire early. And you retire at the age of 45. So you

Starting point is 00:17:11 convert $30,000 from your 401k to your Roth. Okay. And so when you do that, at age 45, you're going to convert $30,000 and it'll be available at age 50. So then if you want to retire at 50, you could start there. At age 46, you convert $30,000. It's available at age 51. At age 47, you convert $30,000. It's available at age 52, and so on and so forth. So by age 50, your first $30,000 is available tax and penalty free. And so here's why I like the taxable brokerage account later with this, because the taxable brokerage account can get you through those first five years. It can help you through those first five years so that you have the bridge to then start converting these So let's say, for example, you decide to retire at 45. You're trying to get to age 50 like our example here.

Starting point is 00:17:55 And so at age 45, you decide I'm going to retire. And so you use the tax brokerage account to get you through that first five years. Then you can start to convert some of this money over to the Roth IRA. And then you can utilize that money as either a supplement or an additional bridge that's going to help you get to traditional retirement age at age 59. Where you can pull from some of these accounts. Now, this strategy is incredibly effective. but only if you follow the IRS rules to the letter because the IRS knows this happens and they have rules around this. So the five year rule number one is conversions. So each conversion restarts its own five year clock. And if you withdraw early, you're going to pay a 10% penalty. So you need to make sure that you were avoiding that at all costs. Five year rule number two is contributions. So if you're over the age of 59 and a half and have had a Roth open for five years, all earnings are tax free too, which is absolutely amazing.

Starting point is 00:18:46 And once you get to 59.5, all those earnings are tax-free. That's where everything gets a lot easier in retirement. Three is only the converted principle is available after five years. So the earnings on those conversions are still going to follow the usual 59.5 rule. So your principle that you converted over, you can utilize that $30,000. But if that $30,000 has earnings, you cannot pull those earnings. You can only pull which you converted and moved over. Because remember, contributions in the Roth IRA can be withdrawn, penalty, and tax. free, which is why we're doing this. And then mind your tax bracket because large conversions can push you into a higher tax bracket or reduce subsidy. So you got to plan your income accordingly,

Starting point is 00:19:26 and you got to make sure that you know where your tax bracket currently is and have an understanding of that. And so that is part of a retirement plan, especially if you're going to retire early, is just being strategic about this stuff. That is really, really helpful. Your CPA can absolutely help you with this kind of stuff, which is why it's very important to have one in your corner, especially as you get to retirement age two. Now, the real magic of the Roth ladder, is tax bracket control because early retirees often have ultra low income, which means they can fill up lower tax brackets with conversions every single year. So an example of this would be, let's say you're married and your taxable income is $30,000 per year after deductions. And the 12% federal income

Starting point is 00:20:06 tax bracket goes up to $94,300 in 2025. So that means you can convert up to $64,000 more and still stay in that 12% tax bracket. That's money that will never be taxed again, ever. That is very, very powerful. And so there's a lot of pro tips that I have for this. I'll give you four to mastering the Roth ladder. Number one is to start early. The sooner you begin, the sooner those five-year clocks start ticking,

Starting point is 00:20:31 but you got to make sure that you are monitoring your income because you don't want to pay too much an income tax. But if you can start earlier and figure out a way to bridge the gap with that taxable brokerage account, that can be very, very helpful. Two is to stagger conversions. So if you create a steady income stream by converting every single year, year and staggering those conversions instead of doing it all at once, that's going to help you tremendously. So every year, stagger those conversions so that they just become available each and every

Starting point is 00:20:54 single year. This is something you could do January 1st or whatever works best for you. Now, again, three is to pair this with that taxable brokerage account because a taxable brokerage account can get you through those first five years. If you decide to retire really early, it can help you bridge through that. And if you want to make these conversions where you can pay zero percent in income tax because of the standard deduction, there are some loopholes that you can talk about. there are some ways to do that as well, and the taxable brokerage account can help you through that process so that you have some money to spend. Now, watch out for some of the ACA Cliffs, but if you rely on ACA subsidies or the Affordable Care Act, plan conversions carefully so that you can stay on top of some

Starting point is 00:21:27 these income thresholds that are there because you don't want to mess that up either. It's really, really important. So the bottom line here is that the Roth IRA conversion ladder is one of the best solutions to one of early retirement's biggest problems. How to access your retirement accounts early. this is one of those ways. It is a loophole that actually allows you to get those dollars from those traditional accounts, move them to the Roth account, and then access those principles that you have moved over. It lets you transfer some of that tax deferred savings into taxed never accounts, and I really, really love that about this. And it's a pipeline of money showing up every single year if you plan this accordingly. So if you do this once a year, you can reduce your tax situation

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Starting point is 00:25:11 Concern about your gambling or that of someone close to you. Call one-66-531-260 or visit connectxonet. All right, let's talk about the rule of 55. This is a way to unlock your 401k early without penalties. Now, this is something where most people believe you can't touch your 401k until the age of 59 and a half. And that's just flat out wrong. This is something that is a powerful IRS rule that is available to everyone where almost

Starting point is 00:25:33 no one talks about this, but it lets you access your retirement accounts five to 10 years earlier without triggering that 10% penalty that most people are afraid of. Now, it's called the rule of 55 and the IRS built this early access pass into the code for people who plan to step away from their job a little bit early. So here's how the rule of 55 works. So if you leave your job in or after the calendar year that you turn age 55, you can withdraw money from your current employer's 401k or 403B penalty free. Now, it has to be your current employer's 401k or 403B. It's that simple. There's no fancy loopholes. There's no complex strategy. It's just a little known IRS rule that can fund early retirement for years. Now, here's a cool thing. If you work in public

Starting point is 00:26:18 safety, if you're a firefighter, if you're a police officer, if you're an air traffic controller, if you're an EMT, you can actually access those funds even earlier than the age of 50. So here's why the rule of 55 is so powerful, because it helps you bridge the gap again of early retirement. So for many people, there's a four to nine year stretch where they think their money is locked, but this rule actually unlocks it. So here's what it gives you. It gives you one, penalty-free withdraws. So you can withdraw from your 401k or your 403B years before 59 and a half. But two, it gives you that steady income stream to fund your lifestyle in your 50s without selling taxable investments. So if you get to age 55, you can start to fund your lifestyle with some of this stuff without having

Starting point is 00:26:59 to sell that taxable investment. It is also a way to delay Roth or IRA withdrawals, giving those accounts more time to grow, if that's something that you're interested in. and it gives you strategic tax planning opportunities, meaning that since withdrawals are tax as ordinary income, you can control your income or tax bracket year over year. So let me give you a real word example of this. All right. Let's say that you decide you're going to retire at age 55 and you're ready to retire and you have $800,000 in your current employer's 401k. So let's see what happens. You leave your job the same year you turn 55. Now you can immediately start withdrawing funds from that 401k without that 10% withdrawal penalty. when you do that. And so you're deciding, okay, I don't want to work this job anymore.

Starting point is 00:27:40 That's too stressful. We just had a changeover in boss. And he is just on my back all the time. I just don't want to do this anymore. It is causing, you know, my cortisol levels to rise. It's not good for my mental health. I want to leave. And so you leave at age 55. And so when you leave, you are able to actually withdraw this money without that 10% penalty. Now, you're still going to pay ordinary income tax on the money and anything you withdraw, but no penalty means you keep more of your money. Now, here's the big kicker is you can even go back work elsewhere and still keep withdrawing from that 401k penalty free as long as you don't roll it into a new plan or an IRA. And so here's a critical thing to think about here because this only

Starting point is 00:28:17 applies to your current employer. So the rule of 55 is super powerful, but you've got to understand a couple of these rules. This only applies to your current employer. And so once you leave after turning 55, if you roll that 401k or IRA into like a Vanguard or Fidelity and you do a rollover IRA, the rule goes away. So that is one big con to rolling money over is that you could lose. the ability to have the rule of 55. Two, timing matters. You must leave the job in or after the year you turn 55. Leaving at 54 and a half does not allow you to qualify. That is why it is called the rule of 55. It has to be in that given year. The plan rules differ. So not every employer plan allows withdrawals under the rule of 55. So you have to check with your employer plan to make sure

Starting point is 00:28:59 that this works. Always check with your HR department or your plan administrator. And you should be in constant contact with them anyway. I would give them a call once a year, talk about anything that has changed within your plans because you've got to understand your plan fully. Now, taxes are still going to apply. So withdrawals from this is taxes, ordinary income, but again, no 10% penalty. And so those are some of the important rules that I want you to note. Now, here's some strategic uses for the rule of 55 because I want you to think about this. It helps you bridge the gap.

Starting point is 00:29:26 So before 59 and a half, you get to age 55, you can utilize the rule of 55 for some additional income. So maybe you've been using your taxable brokerage account for the first five, seven years of a retirement. You've been doing some Roth conversions, but then you get to age 55 and you still have your 401 plan with your old employer. Well, if that's the case and your plan allows, you can start withdrawing from that rule of 55 over that time frame. Secondly, is make sure you look at tax bracket control. Taxes are very, very important. This is why a CPA, again, needs to be in your corner when you are looking at these accounts and withdraw only enough each year to stay in the lower tax

Starting point is 00:30:02 bracket. That's going to be very important. Three, is you can double layer your income. And so if you pair this with a taxable brokerage account or Roth contributions to build up multiple income streams in retirement where you can start to withdraw from some of these accounts. Now, you can also do some cash flow planning with this. Like if you combine this with maybe taking on a part time job, because you can work somewhere else. And so if you take a part time job or if you want to take another full time job, you can combine this with reduced expenses or part time work to stretch your savings even further if you wanted to go that route. A lot of people with the rule of 55 will utilize it so they can go take on part time work and just reduce the hours they are working,

Starting point is 00:30:35 maybe they're in like a very demanding job. And so they will go try to find another job that's going to help supplement their income. And then they will use the rule of 55 for the rest of their income that they need to make up until they get to age 59. Where they can start to access some of those funds. And then when they get in their 60s, you also have Social Security coming in. So there's layers coming into play here over the course of the next decade, especially if you retire at 50. We just talked through the tax of brokerage account. Then we talked through the Roth conversion ladder.

Starting point is 00:31:00 Now we're looking at the rule of 55. There are still two more strategies that we're going to be talking about here today in this episode. So let's dive into those next. Now we're going to talk about the rule of 72T. Now, this is an IRS rule that comes into play and is more complicated than some of these other options. But this does allow you to create steady cash flow for your life by utilizing some of your retirement accounts, even if you retire in your 40s or your 50s and you can access some of your IRA money without that 10% penalty.

Starting point is 00:31:29 We're trying to avoid that 10% penalty at all costs when we are doing all of these moves. And so this is one of the few ways to do it. legally. Now, we talked about the taxable brokerage account. We talked about the Roth conversion ladder. We talked about the rule of 55 and the rule of 72T is something else. The IRS has given us and it knows people sometimes retire early.

Starting point is 00:31:47 And so they created this exception and it's called the substantially equal periodic payments, SEPP, and it's also known as the rule of 72T. This allows you to withdraw your money penalty free from an IRA or an old 401K-403B before 59.5. Now let me explain how this works.

Starting point is 00:32:04 First is you go to the IRS and you commit to taking equal withdrawals every year based on your life expectancy. So you're going to take an equal amount every single year based on how long you're supposed to live. You must continue these withdrawals for at least five years or until you reach age 59.5, whichever one of those is longer. So if you do this at 45, you got to do it all the way till 59.5. You pay ordinary income tax on withdrawals like a regular IRA withdrawal, but no 10% penalty. So again, you're avoiding the 10% penalty, but you're paying the income tax, and that is just essentially what you'd be doing anyway when you withdraw this money. Now, why is this powerful?

Starting point is 00:32:41 This is powerful for people if you're retiring in your late 40s or your early 50s and you need income before some of these other strategies are going to kick in. Number two, if you have significant funds in your traditional IRA or your 401K, this is also a very powerful strategy. And if you want predictable, reliable income every single year instead of selling investments as piece mail, then this is going to give you that reliable income. It is almost like a forced annuity without having to pay some of the annuity fees. And so this is a strategy that many retirees used as a layered withdrawal plan.

Starting point is 00:33:10 So they'll look at taxable accounts first. Then they'll look at SEP and then they'll look at Roth conversions. And then finally, standard retirement accounts after 59.5. And so this is something where you can layer this in. So here's how the math works with this strategy. Okay. When you set up Seth withdrawals, the IRS gives you three calculation methods. Now this is where it gets a little bit complicated and you need to have an understanding

Starting point is 00:33:30 of each of these calculation methods or you need to have a CPA or someone else looking at this helping you through the process. Number one is the RMD method. So this recalculates each year based on your life expectancy and account balance and it creates smaller payments but more flexibility. Two is there is the first amortization method, which is an annual withdrawal rate based on life expectancy tables and reasonable interest rates. And then three is the fixed annuitization method. So this is similar to amortization but actually uses annuitization. factors also fixed payment. So it's similar to an annuity where you can actually turn some of these traditional accounts into something like an annuity without paying the crazy annuity fees that go along

Starting point is 00:34:09 with it. Now, most people choose amortization or annuitization for predictable steady income because they're going to know how much is going to be coming to their account every single month. So let's say you're 52 and you have $500,000 in a traditional IRA. So you set up a set plan using the fixed amortization method. Okay. And if you did that, your annual withdrawal is calculated at $30,000. per year. That's how much that you can withdraw from these accounts without any penalty. Because you're 52, you must continue this for seven years. Again, remember, it's either five years or until age 59 and a half, whichever is greater. So if you do this at 45, you have to do this for 15 years until you get to age 59.5 or 14 and a half years. And so you'll receive that $30,000 every single year,

Starting point is 00:34:51 penalty free, but you'll still owe ordinary income tax on those dollars, but nope, 10% penalty applies. So that means you're getting $210,000 of predictable income over the course of those seven years that you can utilize to fund your lifestyle, especially if you retire early. Now, there's a big catch here overall. The big catch is that this plan is very rigid, okay? Because once you start, you cannot stop this plan. If you do this, here's some of the things that could happen, okay, is you cannot skip payments. You must withdraw every year, even if you don't need the money. You still have to withdraw that money once you start this plan, once you commit to doing this plan.

Starting point is 00:35:26 There's no increasing payments. So you can't decide to take more in another given year. You have to take the same amount every single year. So you really got to plan this out. And there's no stopping early. So if you stop before five years or 59.5. The IRS retroactively applies that 10% penalty on every withdrawal you've ever taken plus interest.

Starting point is 00:35:47 Okay. So if you screw this up and you do not do the right thing here and you decide, okay, I'm going to stop early, they are going to apply that 10% penalty plus interest on every single year that you pulled money from that account. And so you got to understand, all right, this is just like an annuity. I just got to take this money every single year over the course of the next five, seven, 10 years, however long you want to do this for. And that's it. I'm going to take the money every year and I'm going to utilize it. And I can't increase it. I can't decrease it. I am stuck taking these even if your life changes or things change. So you got to make sure that you're planning this

Starting point is 00:36:18 out and you know what you want to do. Now, there are some pro tips to using this smartly. One is to open a separate IRA just for these withdrawals because that way the rest of your investments can stay flexible. Two is start at the right time. Don't begin or start until you're at least committed to that five plus years of withdrawals or before the age of 59.5 and then pair it with that brokerage account. If you have a brokerage account in place and you get these withdrawals coming out, you can also pair that with the brokerage account and have both these options available. So if you retire really early and you're like, I don't know how I'm going to cover it all. I don't know how to get the money out of there. You could look at something like a set plan, put that together with your

Starting point is 00:36:54 brokerage account and some of these other options. options we talked about and you can start to get money out without paying the 10% penalty. And then be conservative. So withdraw a slightly less than you think you need because it's easier to supplement with other accounts than it is to change this. You cannot change this. So if you're unsure, if you are taken too much, you can be conservative with it and then just pull from a taxable or somewhere else if you need to. The rule of 72T is not for everyone. But it can be a lifeline for a lot of people who want to retire early, maybe five, seven, or even 10 years before the age of 59.5, then you can use this without paying a single dollar in penalties.

Starting point is 00:37:26 You're going to get that consistent income coming in. It works very similar to other options out there. It's basically creating your own pension or annuity or creating your own social security until you actually get to that age. And so it's a very interesting way to build out a retirement plan that makes a lot of sense. And so this just gives you another option that you can utilize, even though it's more rigid, it gives you that other option that you can use if you want to retire early. All right, the fifth one is going to be viable for a lot of people out there.

Starting point is 00:37:56 A lot of listeners to this podcast, you'll be able to utilize this strategy. And we're going to be talking about today, Roth conversions plus HSA strategies combined together. Now, this is the hidden weapon of early retirement. This is the secret weapon that a lot of people don't think about, but you can use these two combined, especially if you want to bridge a gap to early retirement and you haven't contributed enough in your taxable brokerage account. Now, most people overlook these two accounts because they don't seem as exciting as something like the Roth conversion ladder or SEP withdraws or the rule of 55. But here's the truth.

Starting point is 00:38:27 Roth IRA contributions plus health savings accounts are two of the most powerful, flexible, and tax-efficient tools that you can use when you retire before the age of 59.5. Now, they're not usually the main course of these conversations, but I really like these two. And I think they do provide some great flexibility. And they'd be very high on my list of usage prior to even some of these other options. Now, here's something most people don't realize is that you can withdraw Roth IRA contributions, not earnings, not conversions, but the money you personally put in any time for any reason completely tax-free. Louder for people in the back, your contributions that you put in the Roth rate, your $7,000 per year, whatever amount you put in in a given year

Starting point is 00:39:08 can be withdrawn at any time for any reason, tax and penalty-free. Another big, powerful strategy of the Roth. It basically is the emergency fund to your emergency funds to your emergency fund if you need it to. Now, I don't want you interrupting compound interest unnecessarily, but you can pull those contributions at any given time. Let me give an example. Let's say you've contributed $100,000 into a Roth IRA over the years. You can withdraw that $100,000 anytime you want. You can go in there and say, I put $100,000 in my Roth, and it's very easy to find this. Like if you use Vanguard or Fidelity, you just go into your accounts and you can see what your contributions have been over the years. And you can do this today. You can do this tomorrow. You can do this 10 years

Starting point is 00:39:46 from now. You can do this 20 years from now if you want to. It doesn't matter when it happened. you can withdraw those contributions. You'll pay no taxes. You'll pay no penalties on that money because you already paid taxes on that money before you were contributing. Now, this is a massive advantage for people who retire early because this is a way to quickly get money and access to money out of one of these accounts without having to follow all these other rules, the rule of 55, or having to follow 72T or having to go into a Roth conversion ladder, you can access some of these funds. Because essentially what this is, is a built-in safety net. It plans and it gives you that instant cash if you decide to retire early. It is also a great tool for gap here. So let's say,

Starting point is 00:40:24 for example, you want to retire at the age of 57. Well, you got two and a half years before you can access your money at 59.5 and you live on $50,000 per year. Well, if you put over $100,000 into your Roth IRA, you're covered for those two years. You can pull that money out, those contributions out very, very quickly. So here's some pro tips for utilizing these contributions. Is track how much you have contributed into your Roth IRA, but again, you can log into some of these accounts and look at it. Now, if you've moved your account around a bunch of times, it may be harder to figure this out. So making sure that you track it if you're going to move your Roth around is very important because you want to know how much you have put into those accounts.

Starting point is 00:40:58 Two, is you can leave those earnings alone until age 59 and a half to avoid taxes and penalties. You cannot withdraw your earnings that the money has made. You can only withdraw the exact amount that you put in, okay? And then use those contributions strategically. So, for example, to cover big one-off expenses out there or to bridge a single year before some of these other income sources are going to be unlocked, you can definitely do that. Again, another reason to use this is if you retire at 53 and you're waiting till the rule of 55, you can have two years bridging the gap there too. So this is the

Starting point is 00:41:25 flexibility that a lot of people need. Now, part two of the strategy is the HSA. If you have a high deductible health plan, you have access to an HSA, which has the triple tax advantage. This is why I like utilizing these two accounts up front. When we look at the wealth builder's journey inside of Master Money Academy, those of you in Master Money Academy know this, we have these in a specific order for the specific reason too, is because if you want to retire early, you have access to these accounts earlier. And so you can get more money pulled out of these. Here's why this is powerful. The money that goes in is tax deductible, meaning you don't pay taxes on the money that goes into the HSA. The money can be invested and it can grow tax free and you can pull the

Starting point is 00:42:03 money out tax free as long as you have a qualified medical expense. Now, the list of what a qualified medical expense is is a laundry list long. So this means that this is triple tax advantage, really good stuff. And so you can do this for a number of different things. Now, most people use HSAs to pay for medical bills immediately. I don't do it that way. Instead, I pay for medical bills out of pocket now, and I save the receipts in something like a Google drive. And then from there, what I do is you can let your HSA investment grow for decades. And so you're letting it invest. You're letting it grow. I leave it in the HSA. I make sure to actually buy investments. And then you reimburse yourself years later. So even decades later,

Starting point is 00:42:40 for those past expenses completely tax-free. Wow, it's powerful to be able to do that. Now, there's no time limits on when you can reimburse yourself. You could break your leg when you're 21 and reimburse yourself when you're 54. It doesn't matter. There's no time limit on when you can reimburse yourself for these expenses, which means your HSA can double as a stealth retirement account. Then, by the time you turn to age 65, you can withdraw money from your HSA for any reason, not just medical, without penalty, and non-medical withdrawals are taxed like a traditional IRA. So it basically turns into it a traditional IRA by the time you turn age 65. Before age 65, you're just using it as this flexible account that you can have, you know, this triple tax advantage there.

Starting point is 00:43:18 If you think about health care and retirement, having an HSA is very, very important because the average person right now is spending about $200,000 per year in retirement on health care. And for folks who have difficult conditions, they're spending well over $300,000 in retirement. And so we've got to make sure that we're preparing for this. But the HSA is also going to help us bridge retirement early if we want to. So here's why this, man. If you think about this for a second, let's do a real world scenario. Imagine you contribute $7,000 a year to an HSA for 20 years, okay? And you invest it without spending it. If you get a 7% rate of return, that means you're going to have $287,000 inside of your HSA. So if you use this for medical expenses, every single medical expense is completely tax-free. But if you want to use it for anything else, it is now a backup IRA tax-on withdrawal, but penalty-free. And if you save the receipts over the years, you can start reimbursing yourself in early retirement tax-free. Just gives you a another option. So some pro tips for the HSA is to save all those receipts. Make sure you're investing in things that makes sense and investing those dollars so it grows and then using them strategically as part

Starting point is 00:44:20 of your withdrawal sequence. Because think about this for a second. Let's say you had some Roth money, okay? And you contributed $170,000 into your Roth IRA over the years. Okay. Let's say you had some HSA money and you had $150,000 in your HSA. Let's say you had with $100,000 in receipts, Okay. Let's say you had a taxable brokerage account. Okay. So over those three accounts right there, and you had a taxable brokerage account with $200,000 in you, okay? Those three accounts right there, we're looking at a little over $500,000, about $520,000 between those three examples that you can start to access funds from right away. And if you spend 50, 100, 150 grand a year, it doesn't matter what it is. This is going to help you bridge that gap for multiple years. And so just combining these

Starting point is 00:45:01 things gives you flexibility, security, tax efficiency, all those different things. Now, these all together, when we look at all these different accounts, these aren't just standalone strategies. These are something that can help you bridge and retire early. And most people didn't know these exists, which is why I wanted to spend some time. And I know this is a deep dive episode. I know this is one of those advanced episodes, to be honest, but this is something we need to know. We need to know this because it allows us flexibility. It allows us opportunity to be able to retire early. This allows us to change our financial lives and change our financial plan. because when you bake in flexibility into your financial plan, your whole life can change.

Starting point is 00:45:39 There have been so many examples of people who have decided to retire early, and these are some of the strategies they use to retire early. There are people who retire in their 30s with taxable brokerage accounts. 40s using Roth conversion ladders. 50s using the rule of 5572T, or just utilizing things like a taxable brokerage account with the Roth, with the HSA, and then starting to unlock some of these other strategies as they become of age. And so for those out there who are thinking through, well, which account should I be contributing to you? Think about your retirement plan, how you want it to look, and start mapping some of this stuff out. This is the fun part. This is the part where you get to get in there. You get to get your hands dirty and decide what do I want to do and when

Starting point is 00:46:16 do I want to retire. How much extra money do I have that I can contribute to these different areas so that I can be able to retire even sooner than I ever thought I could? Because this is going to unlock that power for you. And I'm so excited for each and every single one of you to be able to do that. Our goal here at the Personal Finance Podcast and Master Money is to teach. you these skills so that you can unlock the life that you want so that you can become a millionaire our goal we want a million millionaires to listen to us and so that is the power that you have at your fingertips and i'm really highly encourage you to understand how powerful this information and this knowledge is this is a multi-million dollar decision that you can make and it's going to

Starting point is 00:46:51 give you years back in your life so that you can spend time with your kids your family your grandkids and have financial freedom listen i hope you enjoyed this episode again thank you so much for being in here. Make sure you join Master Money Academy or check it out if you have not. That's where you can get live coaching for me. You can ask questions about stuff just like this and we will answer them live. So thank you so much for being here. I truly appreciate each and every single one of you and we'll see you on the next episode.

The Personal Finance Podcast - Retire at 50..Without Paying a Dime in Penalties or Taxes

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