Cody Garrett, a certified financial planner and founder of Measure Twice Planners, says that people often assume that their tax-advantaged retirement savings are “locked up” until age 59.5 — unable to be tapped outside of cases of documented hardship.
Actually, Garrett recently wrote on LinkedIn, 59.5 is just the age when a person stops needing an exception to avoid a 10% excise tax. Although conventional retirement planning wisdom says to avoid tapping retirement funds early, he added, sometimes it can make a lot of sense.
“I’ve had the opportunity of helping more than 100 families retire early,” Garrett told ThinkAdvisor. “A big part of making that work is helping people get past a lot of misperceptions about how accessible their savings are. This is especially true for middle-class and mass affluent people who have done everything right — saving substantially in their 401(k) and buying a home.”
Despite financial security achieved through decades of prudent behavior, Garrett explained, these families often feel that their wealth is “trapped” and unable to be accessed before they reach their 60s.
“Again, this just isn’t true, and we’re actually working on a book that is going to dispel a lot of the misinformation that is out there,” Garrett said. “It’s going to be called ‘To and Through Early Retirement.’ It’s all about the process of saving for retirement with the end in mind.”
Even when an exception to the early withdrawal penalty applies, Garrett observed, distributions will still constitute taxable income, so it’s important for any decision to tap a retirement account early to be viewed holistically. There are also rules allowing some, but not all, early withdrawals to be repaid in order to potentially reduce or eliminate the excise tax.
Doug Smith, a financial advisor at Voya, pointed out that some employer retirement plans have rules that disallow early distributions while the account owner is still working and contributing to the plan. Even then, Smith noted, advisors can “get strategic” and sometimes find a workaround.
The bottom line, according to Garrett and other experts, is that tapping retirement funds early is a serious decision — but it is neither illegal nor an inherently bad financial move in all cases.
See the accompanying slideshow for seven efficient ways to access retirement funds early, drawn from Garrett’s post and the ThinkAdvisor Tax Facts library.
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