How to withdraw money from retirement accounts before 59 1/2 | Early Retirement - YouTube

Hi everyone; I'm Gaby, and I'm Jay, and this is  our journey to retire all over! On this channel  

we are sharing our experience as we get ready  to retire in six years or so and then spend the  

rest of our lives lives exploring the world. If  you want to know more about us, or want to hear  

an overview of our plan, you can check out our  introduction video! Today we are going to explain  

how we plan to juggle different investment  accounts in order to work around restrictions  

and maximize our savings portfolio; but first,  please hit the like button to help us with the  

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A huge part of any retirement plan is where do you  put your savings so they grow as much as you need  

and are ready to be used when you retire? As we  mentioned in our "What to do with your savings"  

video, the most commonly used tax advantaged  or retirement accounts are 401(k)s, or 403(b)s,  

IRAs, and Roth IRAs. These are great to maximize  the tax benefits, so you want to put as much money  

as you can in these accounts. However, they also  have restrictions when it comes to withdrawing  

the money you saved. The biggest concern is  that you can't easily withdraw your money from  

any retirement accounts until you're 59 and  1/2 years old. All these accounts? Well,  

Roth IRAs are not quite as rigid; but we're  going to get to that later in this video. Anyway,  

since we plan to retire in just six years (more  than 10 years before either of us turn 59 and 1/2)  

we had to get creative in order to make it work.  That's usually where standard brokerage accounts  

come in; these don't have tax benefits, but they  also don't have any withdrawal restrictions. So  

early retirees use them to ensure that they're  covered during their early years of retirement.  

Let's look at our timeline: our retirement year  is 2026. At that time we will roll Jay's 401(k)  

and my 403(b) into IRAs; that's just in order to  make things easier. About 10 years after that,  

Jay will turn 59 and 1/2 and will be able to  withdraw from his IRA. About five years later, I  

will turn 59 and 1/2 and will be able to withdraw  from my IRA. Finally, about five years later both  

of us will hit the required age to get retirement  benefits; from the Teacher Retirement System for  

me, and Jay with Social Security. So we'll start  getting those benefits then. By the way check  

out our video on Social Security if you think you  cannot count on it for your plan. As you can see,  

for the first 10-ish years of our retirement  we will not be able to withdraw any money from  

our retirement accounts. Well, Roth IRAs do  allow withdrawals before the retirement age,  

but just from the contributions (that's the actual  money you invested without the gained interest).  

So, if we have 10 years worth of living expenses  that we will need to cover before we can fully  

access our IRAs we will need to have at least  $300,000 in our standard brokerage accounts or in  

Roth IRA contributions. That is, if we're planning  to live on $30,000 a year during retirement.  

How can someone live well with $30,000 a year? You  can check out our video on Geographic Arbitrage!  

Either way, that takes a lot of planning  ahead making sure we're putting the right  

amount of money in the right account while  we're saving. What happens if we don't have  

$300,000 in our standard brokerage accounts or  Roth IRA contributions? Since we're using our  

other retirement accounts fully, as we should,  we'll probably end up in this situation. So,  

what if we could use the money in our retirement  accounts before we reach the required age? Well,  

it turns out we can! We even have options; and  we're going gonna go through them each from the  

easiest to hardest here. Option one: deal with the  penalties. Option two: Substantially Equivalent  

Periodic Payments. And, Option three: a Roth IRA  conversion ladder. The first option is just to  

take the money and deal with the penalties. You  can take money out of retirement accounts, you  

just have to pay all the penalties and fees. The  IRA charges a 10% penalty for early withdrawal,  

if you take out money before the retirement  age of 59 and 1/2. Also that money is taxed as  

regular income. This is, by far, the least  complicated but also the most expensive.  

If this is what you want to do, that's your  choice but you will need to account for this 10%  

penalty plus taxes in your planning. Slightly  more complicated is what is called Substantially  

Equivalent Periodic Payments, or SEPP. It's  also sometimes called a "Rule 72(t) withdrawal."  

A SEPP plan is where you agree to take a  percentage of your IRA out each year for either  

five years or until you turn 59 and 1/2, whichever  is later. It can't be just any percentage though;  

there are three methods the IRS will allow you  to calculate what percentage you can take out.  

These three calculations are fairly complex;  thankfully Bankrate, and a few other sites, have  

calculators to help with this and Investopedia  has a really good article about SEPP plans.  

The links will be included in the description  below. Each of the methods use government created  

life expectancy tables and a given interest rate  to determine what percentage can be withdrawn.  

These SEPP payments are taxed as regular income so  you would have to be prepared for any additional  

tax bills. Also, there is no way to stop a SEPP.  And if you need to make any changes to your SEPP,  

let's say you want to adjust your living expenses,  the IRS only allows one single change to a SEPP  

once it has been established. A SEPP is far less  expensive than option one although it is very  

rigid in case your needs change or the percentage  withdrawal the IRS allows does not match closely  

to what you are looking for. The last option  is the most flexible and the most interesting;  

and it is completely legal even though it sounds  like it's not. That's the "Roth Conversion Ladder"  

method. Before we get into it, we have to talk  about a very specific benefit of Roth IRAs.  

As we mentioned in our "What to do with your  savings" video, a Roth IRA is one of the four most  

commonly used retirement accounts. Roth IRAs are  very unique in their tax advantage capabilities;  

in that video we talked about how Roth IRAs don't  offer immediate tax benefits, but all of your  

withdrawals are tax-free (including the interest  earned)! And one of the other ways Roth IRAs are  

different from other retirement accounts is that  you can actually withdraw your contributions tax  

and penalty free at any time as long as the  account has been open for at least five years.  

You cannot, however, withdraw any of your  interest earned before you turn 59 and 1/2,  

or until your account's been open at least five  years (whichever is later). A Roth conversion  

ladder is a way of moving assets from a  traditional IRA into a Roth IRA, to then  

withdraw the contributions without incurring  any tax penalties. This works because the IRS  

allows rollovers between retirement accounts once  per year. A rollover is when you convert funds  

from one type of retirement account to another.  Because moving money from an IRA to a Roth IRA  

is a taxable event, meaning that you will have  to pay taxes on the conversion. you want to wait  

until you're retired and no longer making money  so you are at the lowest possible tax bracket,  

so the tax you pay is the minimum. With a Roth  ladder you want to convert as much money as you'll  

need (and here's the kicker) in five years! The  IRS rules say that rollovers must sit for at least  

five years in a Roth IRA before you can withdraw  without penalty. That's the big concern with a  

Roth ladder; you need to plan for five years in  the future. Each year you'll want to convert the  

amount of money that you'll need in five years.  Also even though your conversions will be gaining  

interest each year, you can't withdraw that  interest until you turn 59 and 1/2 due to IRS  

regulations. You can only withdraw the conversion  amount. I know this sounds complex, so let's break  

it down! Let's use our example from the beginning  of this video and say we want to live on $30,000  

per year. To build a Roth conversion ladder, we  start in year one after retiring. We will convert  

$30,000 from our IRA into a Roth IRA and let it  sit there. Because we have $0 in income during  

retirement (because we're no longer working),  we only owe income taxes on this conversion  

and will probably fall into the lowest tax bracket  10%, so we would owe $520 in income tax. That's  

because we'll most likely have just the standard  deduction of $24,800 and owe taxes on only $5,200.  

Not bad to convert $30,000 and never pay another  penny in taxes for it! If we simply withdrew this  

money and paid the penalty, we would owe that  $520 in taxes plus an additional $3,000 in early  

withdrawal penalties! But remember with the Roth  ladder these $30,000 have to sit in that Roth IRA  

for at least five years until we can withdraw  them. So those funds will only be available  

in year six. In year two we do the same thing:  convert $30,000 from our IRA to our Roth IRA,  

pay $520 in taxes. Again, this money has to  sit for five years, so it will be available to  

withdraw in year seven. In year two, however, our  Roth IRA will have gained interest on the money we  

converted in year one! But remember: withdrawing  interest is restricted until we're 59 and 1/2.  

Year three, the same: we convert, pay taxes, and  the money will be available in year eight. Until  

then it will be gaining interest; but for that  we will have to wait until we're 59 and 1/2.  

Year four we repeat the process, and again in  year five. In year six we will do the same thing;  

but now we can withdraw our original $30,000  we converted in year one, but remember not the  

accrued interest (for that we will still have to  wait until we are 59 and 1/2). But we can spend  

our $30,000 without owing the IRS any additional  money. And like that, we keep converting  

every year until we deplete our IRAs. In fact,  we're gonna keep doing this even after we turn  

59 and 1/2 because it will allow us to pay less  in taxes than if we're spending from our IRAs.  

Plus, Roth IRAs aren't subject to Required Minimum  Distributions like standard IRAs, but that'll be  

for another video. Finally, once we reach 59  and 1/2, we'll be able to withdraw any accrued  

interest from the conversion with no penalties  or taxes. You may have noticed that the way we  

have it the first years of our retirement are not  covered. How will we pay for our living expenses  

while our money is sitting in a Roth IRA? Well, we  ultimately do need to ensure we have at least five  

years of living expenses in a standard brokerage  account and that can be a bit of a headache. But,  

not using a Roth conversion ladder would make that  10 years instead! So, it definitely helps. Bottom  

line: however you want to approach it it really  is up to you. Just make sure you're aware of all  

your options and how they work for your situation  and what your retirement goals are. So, what do  

you think? Have you been trying to juggle how much  you put in each of your accounts? Are you avoiding  

the benefit of retirement accounts in favor of  brokerage accounts? Is it just too complicated  

and you're just keeping one account? Or, are you  trying to be strategic on your planning? Let us  

know in the comments below. Please follow us on  social media or our blog at gabyanjaysjourney.com.  

Like this video, subscribe to our channel, hit  the bell to be notified when we post new content!  

Until then: please stay safe, do your part, take  care of one another, and thank you for joining us!