I've done a bit more research since posting on the retirement account puzzle. I now see that there are more options to get the money out of US retirement accounts without penalty before age 59 1/2 than I thought. The main one is if you convert the account into a lifetime annuity you can withdraw the money anytime without the 10% penalty (see comments for a better option suggested by Stealthbucks - coincidentally one of my local fiannce radio shows is talking about it right now...). For 401(k)s and 403(b)s it will be taxed at your marginal income tax rate rather than the lower investment (long-term CGT, qualified dividends) rates. You can get a variable annuity which varies with an underlying investment or a fixed annuity. A key issue here will be your tax rate when making contributions vs. withdrawing them. If you are happy with the annuity option and the tax rates work out in your favor then this could make sense. However, for a Roth IRA the distributions are taxable before age 59 1/2. So 401(k)s, 403(b)s, and traditional IRAs are clearly superior for this purpose and I think taxable accounts are too.
The other way money can be withdrawn before age 59 1/2 without penalty is if you are over 55 and leave your job or make a hardship withdrawal etc. (Roth's also allow a withdrawal for the first time purchase of a residence after the account has been open 5 years).
Australian retirement accounts are not as flexible in terms of withdrawing the money before age 60 (for those of us born in 1964 and later). It's not even a question of paying penalties.
Please only use my blog as a starting point to do your own research as I am not a qualified financial adviser of any sort.
4 comments:
Moom, I don't like the annuity answer. Check out rule 72T. This is your cheaper, better, stonger, faster... method of getting the money out. It is a government tax rule so go to IRS and search away. P.S. I'm back from a long and tedious trip. Good job on May numbers. I am not so skilled. I also can't move a ton of deferred comp that must remain in the S&P 500 so, even at my best, I get hit in down markets.
Thanks so much - wonder why I didn't come across this method while searching for "early withdrawal 401(k) etc.)? You can just do a Google search also to get lots of useful information on this. Still a Roth IRA is going to be a dumb vehicle to save up to do this. But would this make me put additional contributions into a Tradtional IRA or my 403(b) - I don't think so - it's really going to depend on time horizons. If you are 22 and want to retire at 50 then maybe deferring the tax but converting to ordinary income tax rates on the income makes sense. Would have to do some simulations. But at age 41? BTW the long-term cap gains rate for people in the 15% federal tax bracket has just gone down to 0%! Sure there is still state tax if it applies in your state. Also who knows, this 72T rule might be abolished in future?
Yes, A roth IRA and this rule makes zippo sense> As for 72T changing, it is possib;e but not likely. Obscure tax code rarely changes and the gov. collects early for those who use this rule so this is a doubloe reason not to change. I don't intend to use it though. It's more in the funky trivia catagory....
I guess that's the trend with the introduction of Roth IRAs - bring the tax revenue forward. Kinda like what the guys at Enron did :) Still I just wonder whether all the people maximizing retirement account contributions at a young age really understand all the implications. Or do they just see "tax break" and think that is cool? Like people who buy a house to get tax breaks on interest and capital gains without really thinking it all through in detail.
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