How to Access Your Retirement Money When Retiring Early

Many doctors dream of retiring from the workforce before the traditional retirement age of 60-70. Most of them cannot do it because they spend too much, did not save enough, and did not invest wisely. They simply do not have the resources to retire at their desired standard of living without additional savings, a few more years of compound interest in their investments, and perhaps even the additional income from Social Security.

Don’t Let the Age 59 ½ Rule Keep You from an Early Retirement

The select few who do have the resources to retire earlier than that worry about the age 59½ rule. This is a rule that applies to retirement accounts like traditional IRAs and Roth IRAs. At its most basic level, the rule says that if you withdraw money from an IRA prior to age 59½, you will pay any taxes and also face a 10% penalty. However, this rule should never prevent someone who is otherwise able to retire prior to age 59½ from actually doing so—for a number of reasons.

#1 Withdraw from Taxable First

Anyone who saved enough money to retire before age 59½ probably could not fit all of their savings into their available retirement accounts. They likely also have a sizable taxable account from which money can be withdrawn without any penalty, simply by paying any long-term capital gains taxes that are due. Those taxes, of course, only apply to the gains; the principal comes out tax-free.

Generally, the earlier you retire, the larger the ratio of your taxable accounts to your retirement accounts will be. So, you can simply live off the taxable assets until you turn 59½ and then tap into the retirement accounts. Spending taxable assets first is generally the best move anyway, as it allows your retirement accounts to continue to benefit from the tax and asset protection offered by retirement accounts for a longer period of time. Taxable assets also create their own income, whether it’s qualified dividends from mutual funds, interest from certificates of deposit or bank accounts, or rents from income property. These sources of income can be used to cover your retirement expenses instead of being reinvested.

#2 457(b)s, 401(k)s and 403(b)s

Many types of retirement accounts are not subject to the age 59½ rule. For example, many doctors are eligible for a 457(b) account, a type of deferred compensation. While the distribution rules in each 457(b) are different, you can often access this penalty-free money as soon as you stop working. Meanwhile, 401(k)s and 403(b)s have an age 55 rule where you can withdraw from them penalty-free once you are 55 and have stopped working. If you plan to do this, be sure not to roll your 401(k) into an IRA as soon as you separate from the employer.

#3 HSAs

Withdrawals from HSAs to pay for healthcare are not subject to the age 59½ rule. Those withdrawals come out tax- and penalty-free at any age. While an HSA generally cannot be used to pay for health insurance premiums, it can be used to pay premiums for COBRA (the federal program that allows workers to continue benefits provided by their group health plan for a limited time following a job loss or certain other life events). After age 65, all withdrawals from an HSA are penalty-free, although they’re only tax-free when used for healthcare.

#4 Roth IRAs

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