Early Retirement Strategies: Retirement Accounts and Tax Efficiency

Early retirement strategies include Roth conversions, 72t distributions, and rule of 55 for accessing retirement funds before 59.5.

### Strategies for Early Retirement: 401(k) Rule of 55, 72(t) Distributions, and Roth Conversion Ladder
* 💼  Retirement accounts matter even for early retirees, as you may need **post-59.5 funds** and can access them early with **certain strategies**.
* 🔗  Taxable brokerage accounts offer flexibility and favorable capital gains rates, but require **immediate tax payments on earnings**.
* 🔢  The Rule of 55 allows penalty-free access to 401(k) funds at **age 55**, but only from the **current employer's plan**.
* 📊  72(t) distributions provide penalty-free access to retirement funds, but require **annuitization for at least 5 years or until age 59.5**.
* 🔄  The **Roth Conversion Ladder strategy** involves converting pre-tax retirement funds to Roth, with **tax-free access to conversions after 5 years**.
* 🏦 " The accumulation process is pretty straightforward. You just save pre-tax, you follow the Foo, you **max out your 401(k)s**, you **max out your IRAs**, you don't have to get super complicated in how you are accumulating.
* 📈 " The government has always allowed anybody, like right now, I could go and start converting a portion of my pre-tax or tax-deferred assets into Roth, and the government's all about it because back in 2010, they took away all **income limits**.
* 🧮 " If you're in those peak earning years in that higher tax bracket and you're trying to do this Roth conversion so you have a bridge of that five years, it just doesn't align because you're **paying at much higher rates**.

three ways to retire that you might not even know. [Music] about. BR. I am so excited about this because this is all the rage. If you go read any uh literature in the fire Community, or as we like to call it, the fine Community, they like to talk about retiring early and strategies, and we want to speak into that. Maybe you're someone out there who wants to leave the workforce early, but you recognize there might not be easy ways to get to your dollars. We want to share with you some today that are maybe lesser known to you that you should know about. Well, first, let's let's lay out some ground rules or some framework here. One of the things that drives me crazy about social media is that it always feels like what gets the clicks is the extremes. So there's people that will tell you you need all of your money in like after-tax assets, meaning brokerage accounts and other things. Retirement accounts or 41k is trash. They they'll say that. And then this side over here will be like no.

let's load up only into these retirement accounts over. I get nervous when anyone is telling you that it is a binary decision zero to one. That is not right as we all know the reality of personal finances. There's a lot going on. It's very personal in nature, and people ask us all the time, guys, I love the financial order of operations, but if I want to retire early, can I still follow the food? Does that work? And what we want to walk you through today is that you can still follow the food. We're going to share with you sort of like academic ways to approach retiring early, and then we're going to talk about what we see in practice with our actual clients and how that plays out. So it's going to be a lot of fun, I think, for us to dive into. So let's talk about first why we still think that retirement accounts matter because you said something so interesting, Brian. You said, All right, some people say don't do retirement accounts if you're going to retire early, just do taxable brokerage forgo your.

401ks forgo your IRAs for all that their language is even harder. Your 401k stinks. Yeah, I think that is asinine, and there's two real reasons why we would say that. The first is odds are even if you retire early, you're still going to need money post 59 a half. Yeah, you might need something to bridge you from 50 to 60 or from 35 to 60 if you're retiring super early, but there's a good chance you're also going to need dollars post 59 a half. So why not optimize? Why not take advantage of tax opportunities that exist to you today so that those dollars can continue to grow tax? I think a lot of people, they think when they do tax analysis, they assume that everything is static and it stays the same, but we're not. It's just not the reality of the world. It's because tax rates change over the years. Also, your tax rates are going to change because while you're in your Peak earning years, you're probably paying higher rates when

you retire, you're hoping that there's some type of gamesmanship or ability to play the system to lower your tax rate and create a better opportunity for yourself. One thing you may not even recognize is that there are ways to get Early Access to your retirement accounts while still getting the tax advantages so you can literally have your cake and eat it too. We're going to talk about some of those in retirement accounts, but I think it's worth mentioning before we dive in. Let's talk a little bit about taxable brokerage accounts. Let's talk a little about after-tax accounts. This is the typical Bridge account. If you think that you're going to leave the workforce before 55, before 59 A5, you need to be thinking about is this a viable tool for me. By the way, before we even start on this, I think that's two key dates that everyone should write down right now. If you think you're leaving the workforce early, you need to know what's the age you turn 55, what's the age you turn 59, and a

half the age that you turned 55 is 55. How far are you from these key dates? Good point. It's a good point, but how far are you from that because this is going to help you back into the answers, and probably a good place to start is these taxable brokerage accounts. Yeah, and we see people use these all the time because while there aren't benefit on the front end of taxable brokerage accounts, one of the huge benefits that exist is that as these dollars grow and as you transact inside of these, they're actually subject to favorable tax rates, not ordinary income rates like what your pre-tax or IRA accounts are subject to, but they are subject to capital gains rates, which generally and historically have been lower than marginal tax rates. Yeah, as you can see, your earned income, your traditional retirement contributions are all subject to your highest ordinary income tax rates. Uh, we'd much prefer paying lower capital gains rates, lower dividend tax rates. That's why there are some benefits definitely to using these taxable brokerage accounts to be your bridge and

when we think through our clients that have entered into early retirement that are part of the fire movement part of the fine movement most of them have access to taxable accounts, and using that after-tax account is part of their strategy. But what's really interesting is for our folks, it's not an all or nothing. It's not 100 one way and zero the other way or vice versa, and we want to kind of chat through that. So let's talk about some of the pros and cons to taxable brokers' accounts. The first pro is that anyone can open one up. Like if you are above the age of 18, you can open up an after-tax brokerage account, and you can begin funding it. There's no income limits, there's no exclusivity limits, you don't have to have earned income. You can open up an account and begin funding, so it is super, super accessible, super available to everyone. Yeah, I like has no contribution limits. It makes it so much easier because it does allow you to if you have margin, if you live a disciplined life, and you live

on less than you make, and you have the margin, you can open up a taxable brokerage account, yep, and there's no withdrawal restrictions. You don't have to wait until age 59 and a half. You don't have to, uh, pull out only a certain amount or pull out a minimum amount each year, so it really is the most flexible type of account. We already mentioned it's subject to long-term capital gains that are at favorable tax rates. Now you have to make sure that you hold this, you hold the individual investment or Securities at least for a year, so it's subject to long-term capital gains, but that's a lower tax rate than you pay otherwise. But taxable brokerage accounts are not all rainbows and butterflies. There are some downsides to them, yeah, I mean current year income. Whatever these taxable Brokers accounts make, whether it's interest, whether it's dividends, whether it's capital gains, you are going to pay income taxes in the year that you earn money. That is not necessarily the most favored way when you can think

about the fact there's Roth assets that grow completely tax-free. There's tax-deferred assets that they make the deal that yes, you don't pay any income tax now, but when you pull it out, you will pay taxes at ordinary income tax rates later. So you just need to know what your tax rates are. But in when we're talking about taxable brokerage accounts, they do require you to pay those taxes in the current year. That's definitely a con. All right, so we've talked about the taxable brokerage. Now let's switch over to talk about retirement accounts because this is what gets a lot of the fodder in the fire and fine community. People say, hey, I want to take advantage. I want to build up my retirement accounts. But if I'm going to retire early, how do I go about using them? And there are simple ways like 457s or like military pensions that might be a great option for you to retire early. But they might not. Those types of accounts or those types of benefits might not be available to you.

but there are still ways that you can retire before age 59 and a half. The first of which you've heard us talk a lot about. This one is one that's really really exciting. And again, it's accessible not to everyone but to most people. And that's the rule of 55. Yeah, the rule of 55. Fortunately, the first account that hits seven figures is the 401K for most people. So, this is a good thing especially with the rule of 55. This is because what this rule allows is if the year you hit 55. So, you can actually be 54 years of age when this happens. But the year that you retire you break service from your employer that has the 401K if you're turning 55 that year you actually get penalty-free access to those retirement assets. Now you're still going to pay income tax on it but it wipes away the 10% penalty. But it has to be with the 401K that you are currently employed at your current.

employer. So it's not like you can leave one employer at age 50 and go work somewhere else and then try to pull from that old 401K unless you've rolled it in. So your account structure matters. If you want to take advantage of the rule of 55, you need to recognize that your Bridge assets, the dollars that you're going to use to get you from age 55 to age 59 A2, need to be in your current employer 401k plan. So if you have a bunch of old 401K plans that you've left behind and old providers, you might want to consolidate those before you actually retire so that you can get access to those dollars. Yeah, so you've look this rule of 55 is powerful. We've used this with a number of clients. You just said something that was very key. If you know that you're retiring in a few years and you know you'll be in that year that you hit 55, that's because that's a nice Halo.

it's like playing horseshoes with your retirement. Is that let's why not roll a little bit of money in there or how about this maybe you are leaving this employer. You don't have to leave everything in that 401k. You just might need to leave enough so that you actually get to maximize this rule of 55 until you reach 59 and a half. And maybe you roll out some of the other assets cuz you want to have other opportunities or different custodians. There's all kind of reasons why that might come play. And then the other thing you need to recognize is that uh while Roth 401ks can be subject to the rule of 55. You'll be taxed on the gains if you try to pull money out before 59 a. half. So generally speaking rule of 55 is much more advantageous for pre-tax traditional 401ks in retirement accounts as opposed to Roth. Because really for the Roth we really want it to be tax-free. So we don't want that gain to be taxable.

income so you're going to try not to pull out of those certainly not the earnings portion of those before 5 uh before 59 A2. So let's talk about when it comes to rule of 55. What are some pros and cons? Well, the first pro, it's pretty simple. You don't have to have like an advanced uh degree in finances to understand. Okay, in the year I turned 55, current 401K I can start pulling my money out no penalty still pay ordinary in you're going here in a minute. We have other rules where you have to do all these calculations. You have to annuitize all this is simple. I like if you if you are in the year that you're turning 55 at this employer you qualify to get this penalty-free access to these retirement assets. I love that and what I like is not only is it simple you get immediate access to the entire and full account balance right. You don't have to have some special part of it chiseled off and

then the other benefit is it's tax-advantaged. If your tax bracket will decrease in retirement, meaning if you were saving in the pre-tax during a higher income stage of your life, and then when you get into retirement, your income drops in your lower tax bracket, then this will have been a positive arbitrage for you. You would have gotten a bigger tax deduction earlier in life, and you're going to pay less taxes now. That's a benefit, but again, even the rule of 55 is not perfect. There are some negatives, there are some cons associated with it. First, you got to do your research, make sure that your plan actually even allows this. When the plan was designed, this is something that your employer had to choose to allow this for it even to be available to you. The other thing is that it's limited to your current 401K. So again, if you have old 401ks, old historic account, you don't get access to those. It's only the 401K at the employer you're working with when you retire in the year that you turn 55.

so you have to make sure that you consolidate accounts, and it's in the around account structure, and don't forget to do the work to figure out what is the year that you actually turn 55 because that's what you have to be in that year because this would break my heart if you do you're planning on going into this fire SL fine movement where you're going to the next Endeavor of life you want to own your time that much sooner, and you do this at 53 you're going to have a sad Awakening that you might have had a huge opportunity to get access to money t penalty-free um but you just chose the wrong time so pay attention to the dates remember at the beginning of this I said write down how far away you are from age 55 and how far you are from 59 and a half especially if you have Roth assets these are key important dates that you need to understand and hit it right so that you don't make a bad mistake that cost you taxes and penalties and you

just need to make sure you measure twice, cut once. All right, Brian. So, rule of 55 is pretty straightforward. It's fairly simple. Now, let's move on to strategy number two. And this one is a little more nuanced, a little more complicated. And this one, again, is all over the personal finance sphere when you talk about FIRE and fine movement folks. And they're called 72t distributions, named after the specific part of the tax code where this is written. These are a little unique. These are something most people don't encounter. I don't mind sharing. When I was studying for my original, you know, CFP materials, and then even in practice, you hear about this, you know, substantially equal periodic payments. This is somewhat sexy in the fact that if you're a math-minded person, you're like, wait a minute, I could actually retire at 35 and still get access to all my retirement assets, or whatever portion of the retirement assets I need, if I just did this cool little math thing and I annuitized it. There's something about the financial.

mutant brain that I thought this was a cool Endeavor, but I but I think and we'll go through and maybe you can even walk through how does this work Bo, but I will tell you more of this is academic than what we've seen in real life. That's exactly right. What a 72t distribution allows you to do is every year, it allows you to pull out a substantially equal periodic payment from your retirement account so you can receive payments before 59.5 from those qualified retirement plans without penalties. Again, you are still subject to ordinary income tax, but you can wave the penalty so long as certain things are met, certain conditions. So a lot of times when people uh decide how they're going to use 72t, you really have to begin with the end in mind. You have to sort of back door into okay, how much of an income do I need and over what period of time do I need that income. So when it comes time for me to retire, how do I segregate my accounts in

order to take advantage of 72t. So, here's how it works, and this is sort of like the loose 30,000-foot overview. First, you want to choose your account. It can be a 401k account, it can be an IRA account. Oftentimes, individuals will split up their IRAs or split up their 401ks and specifically choose one account in which they're going to implement their 72t distributions so they can have some sort of guaranteed income stream. So, they choose the type of account that they're going to use, and then they have to choose the payment method. Now, this is where it gets a little more complicated and a little more nuance. There are really three different payment methods that you can select from. There's the RMD payment method, which is recalculated every year based on the portfolio value and your life expectancy. So, this number will not be the exact same every year, it will fluctuate a little bit based on mortality factors, but it's substantially equal, that's why they don't say exactly.

equal, they say substantially that's option number one. Option number two is the amortization method where essentially it kind of works like a mortgage. You pick the interest rate and the timeline, and it will amortize over a certain specific amount of time to pay you a guaranteed payment. Or the third way you can do is kind of a combination of the two. It's the annuitization method where, again, based on your mortality and a stated interest rate and a stated timeline, you can annuitize a specific payment over a specified period of time to receive a certain payment. And this is this column right here, choose the payment. I think this is the part when I was the, you know, the person learning all these concepts of how you get access to these large retirement accounts without paying all these penalties that you're so worried about and you're trying to avoid. I love that this was one of those things where you don't have to do it off the entire account. You can chisel this off, and it's a math calculation. This is why.

I think US financial mutants are drawn to these types of strategies because you can just figure out back into what will I need to be my bridge account to get me to that 59 and A2 period where I get access to everything you know under the tax code. And can I back in into the math of how I do it, but there is something you need to be aware of 'cause a lot of these you have to figure out how long do I have to set this in for. Is this a set it because it is one of those things if you choose a 72 um distribution rule once you choose you get a lot of flexibility. We just laid out these three ways, but once the day you execute this you're stuck with this for hear the hear me out on this for five full years or until you turn 59 and A2. And it's not the shorter of those two numbers it's the longer of those two numbers so you need to really pay attention 'cause once you set it you are locked in on this so it is something.

that you kind of measure once again measure twice cut once to make sure you get this part right. The longer your retirement window is or the longer the further you are away from 59 a half, the more complicated this becomes. Because imagine if at age 34 entering into age 35, you're planning on taking advantage of 72t distributions to bridge you from 35 all the way out till 59 half, man, your calculations better have been spot on. You better have a really good bead on what your living expenses are, or if you don't, you better have another source of funds, source of resources that can help you pay for it. So, 72t can be attractive, and it can be unique, and it can give you a way to access your retirement dollars, but there's a lot that goes into it. I do want to give the caveat because we said this earlier, but I want to make sure people didn't overlook it. If you have Roth assets and you're really excited because we love the tax-free growth.

realize you don't truly get that access to the tax-free growth portion of this until you're 59.5 so make sure you understand there's a little caveat in the rule that you don't get to really do grab that until you reach that age so be careful with that all right so let's talk about the pros and cons. The benefit one of the pro of a 72t distribution is the accumulation process is pretty straightforward. You just save pre-tax you follow the food you max out your 401ks you max out your IRAs you don't have to get super super complicated in how you are accumulating that part of the process is pretty straightforward and then it is tax advantage again if you're in a higher tax bracket while you're accumulating and a lower tax bracket while you're de accumulating you got a bigger tax benefit when you were earning the dollars and you pay lower taxes when you go to pull those dollars out but there are Cons with 72 TS yeah I mean it it's got there's some complexity

here so there's risk. I mean especially think about somebody you gave the example 34. But I I'll even get a little closer um and say if you did this like you're between 45 and 50, you know you're locking yourself onto this for the next 10 years. That could be somewhat scary. And by the way, there's some complexity and if you mess this up, the penalties and the costs could be pretty severe. So that's definitely something that probably keeps people to being a little nervous about, hey what am I not thinking about or what unintended consequence will I create here, yeah. And there you already mentioned this, there's such there there's very little flexibility in the beginning. You can have some flexibility in terms of how big the account is that you establish the payments on and what method you used to calculate the payments, but once it starts, once the timeline starts, you're locked in, you can't change that a touch. So these are really really interesting and and it's really really a fun academic exercise, but I think it's worth.

noting, and we'd be doing a disservice if we didn't acknowledge this for most of our folks who implement retirement and enter into fire, or enter into fine. While 72t is something we might have a conversation around, and it's something we might investigate, I feel like it's much more academic than it is practicable. A lot of our folks who actually enter into retirement to pay for the living expenses, this isn't one that we see being the most often used method to provide for retirement living expenses. I find working with a number of fire movement individuals is that these typically, if you're going to be cuz anybody in the movement is saving large sums of their income. I'm talking 40-50, even 60% of your gross income. So for you to be able to still have a life and to save 40 to 60% of your income, you probably make a good living income. And it's not uncommon also for a lot of these fire people to have restricted stock units because maybe they work for

a tech startup or some company out there that incentivize their retention through stock options through RSUs so it's not uncommon that you just naturally are going to have tax favored accounts but you're also going to have big after-tax assets and so this you said it exactly right. A lot of times these are more academic you know analysis because it's it's not ideal and the complexity and you know locked in for a decade or longer it can be somewhat scary. All right so let's talk about the third strategy again this is another one that's very very popular amongst fire and fine proponents and this is a Roth conversion ladder. Now what's interesting we love Roth conversions and we talk about Roth conversions all the time and we have tons of retirees and early retirees that utilize Roth conversions as part of the process and stated very simply what a Roth conversion is is where you convert some of your pre-tax assets whether that be in a 401k or an

IRA into Roth, which sounds amazing, and we do that often. But when it comes to retiring early, a lot of people are doing these Roth conversion ladders as a specific and unique means to get access to their Roth dollars earlier than they would otherwise. Yeah, I think that this is, this is once again, I love Financial mutants 'cause you know that there is some brilliant person that came up with this. Because we were talking about 72t, and I, I gave you that, that, that caveat that if you're talking about Roth money, you don't actually get tax-free growth until you're 9 and a half. Well, then somebody said, Well, wait a minute, there's got to be a way I can still work my way around that. And somebody realized in the tax code, there is tax-free growth and then there's what's called Roth basis. So if you do a Roth conversion, wait the 5 years after you paid the taxes on it, that's now your basis in the Roth. So it gets you around that 595 exclusion this

on paper looks awesome, but there are some issues. Yeah, there are some. So before the issues again, I want to just show a picture of exactly what you said. How's it work? You put money into your 401k. You can go all the way up to $223,000 in the pre-tax 401K this year. At some point in the future, you convert that to Roth. You convert some portion of that to Roth, and you're going to pay ordinary income tax at your tax rate in the year that you convert. If you then wait five years (the clock starts when you start when you convert), if you wait for five years, then you can pull out the basis penalty-free and tax-free. You can start getting to that converted amount, not the earnings, the converted amount penalty-free and tax-free. Well, that you can rinse and repeat and rinse and repeat and rinse and repeat. So if you think about this, let's assume that you are 50 years old, and you're planning on retiring, and you want to have some assets that you're

able to begin drawing on starting at age 55. One of the things you can do is at 50, you can convert to Roth, pay income taxes, convert to Roth, pay income taxes, convert to Roth, pay income taxes. Do that every single year. Well, then when you get to age 55, once that very first conversion has aged, you can then withdraw that $30,000 of converted funds, not the earnings from your Roth, completely tax-free and penalty-free. So, in your 55th year, you can pull out the conversion you did at 50. In your 56th year, the conversion you did at 51. In the 57th year, the conversion you did at 52, so on and so forth. So essentially, what you're doing is you're going and grabbing those dollars that you had previously converted. It gives you access to your Roth before you would otherwise have at $59 a half. But again, I just don't think that it's perfect. I think it's good, but I don't think that it's perfect. Let's get into what it is good at.

and what it's not good at because you'll notice on the proos side it is nice and look the government loves this too there's no limits on the conversions because realiz the government has always allowed anybody like right now. I could go and and and start converting a portion of my pre-tax or tax deferred assets into Roth and the government's all about it because back in 2010. They took away all income limits this is what allows Roth conver backdoor Roth contributions and and and other conversion strategies is because there's no income limits on doing Roth conversions so you can do it. The catch is though you got to pay income taxes on these conversion amounts because you are creating ordinary income when this happens that's right and so in in theory it can be tax advantage if your tax bracket decreases meaning if you were funding your 401k when you're in a higher tax bracket and then when you go to convert those dollars you're in a lower tax bracket then it can be tax

advantage. But remember, one of the things a lot of people do is they begin converting before they get to retirement. So then it may not be as advantageous as you think. Let's think about this because I was when we were doing show prep on this. I was thinking about who is the person because I saw the notes a tax advantage if your tax rates decrease in retirement. What we're talking about trying to create a bridge account. So the only way this works is if you are say let's go back to this person that's retiring at 45 and maybe for they had enough after tax assets that they they're now they're earned income is gone so they're in a much lower. So they're living on those after tax assets as a bridge account for a little bit maybe as part of this they're doing Roth conversions while they're in that lower tax bracket and then in five years they would have access to those bases even though they haven't reached 59.5. I could

see how that is, but is that the reality of what most people, I that's the part that I don't 'cause what I have seen in my practice is that people who have large after-tax assets like these people in the fire movement who worked for tech companies and other things, they're going to have such a big basket of these Roth asset. I mean of the after-tax assets that when they have the option of converting it to a Roth, are they going want to use Roth as their bridge, or are they going want to keep staying on that after-tax train. We can keep on with the cons, but that's what I where I think this thing falls apart. I'm right there with you because one of the cons is there's a 5-year delay on you accessing those, but I'm going to say that's a con because you can access it at 5 years 'cause here's what we love to see Roth assets do exactly what you said if you're going to go through the work of converting dollars to Roth the way that you

maximize the benefit is let those dollars grow tax-free for as long as possible. If you just wait five years and start pulling that money out, you were pulling out some of the most valuable soldiers in your army of dollar bills. We'd much rather see you convert at age 40 or age 45 and let those dollars grow for the next 20, 30, 40, 50 years. Even then, you can have amazing tax-free growth inside those RTHs. If you pull it out after just five years, man, they're sort of leaving the dance early. Well, and I don't mind sh this is one of the things, and we have fire clients that we've had quite a few conversations on this. One of the hard parts with being in this situation is a lot of times people who are able to save 40 to 60% of their income, you're good at your job, and you make a great income, and your income as you're getting more and more into your career, your peak

earning years are probably going to be in your late 40s, early 50s. This is right as you're in the exit window there. So if you're in those peak earning years in that higher tax bracket and you're trying to do this WTH conversion so you have a bridge of that five years, it just doesn't align because you're paying at much higher rates. It's a very small window for people whose tax rates actually go down to do these conversions while you're working. So here's the million-dollar question: if I'm going to retire early, what's the best strategy? What should I employ in order to retire early in the most effective and efficient way possible? And unsurprisingly, as the great financial advisers that we are, it depends. It depends on your situation because personal finance is very, very personal when you think about how you are accumulating your wealth and then when you retire, whether it's an early retirement or later retirement, how you de-accumulate your wealth. There are a

number of variables that you need to take into account. I mean just from the tax standpoint, you need to think about, okay, what's my retirement spending going to be, what's my income pre-retirement and post-retirement, where am I going to live, am I in a high tax state now, am I going to be in a no tax state in retirement, what do my different account structures look like, what's my tax filing status now, and what do I believe my tax filing status will be in the future. Those are all factors that are going to affect which strategy makes the most sense for you. Well, it's also the needs. This is part of the we've done lots of fire shows, and it's interesting how when you leave the workforce, especially when you're younger, there's still lots of life that's going on because think about if you leave the workforce while you're in your late 40s or even early 50s, you likely have kids in the house still, you know, going to college, so your needs are different.

while you're getting the kids through school, than it is when you're an empty nester. So those type of needs and it's, it's going to change your withdrawal strategies. It's going to change how you structure your accounts. All these things come into play and that's the variability that makes this very personal. And then even your goals, right? Like is, is the goal for your wealth to leave behind a legacy for your children or for heirs? Or are you thinking about maybe I want to be part of the fire, fine movement because I want to take sabbatical. I want to not work for a period of time but then I might need to return to work or I might have a desire to do something else. All of these things into play and so what we have found again in our practice is while all of these strategies are wonderful and interesting in a vacuum, we find they're actually best used when they're kind of combined. It's not uncommon for our early retirees to be saving in their retirement accounts but then also

building off after-tax assets. But then, when they get into retirement, also executing Roth conversions. That it's probably not an all-or-nothing. It's a very personalized, unique strategy that makes the most sense for your unique financial situation. Yeah, I think about like my specific situation and some of our clients that are in a really good financial situations. They've accumulated well those WTH assets because remember the government restricts how much you can put in. They restrict how much you can make to even make contributions. So if you can get a big basket of money in those Roth accounts, there's a huge legacy opportunity, there's an estate opportunity for most people. Now you get that 10-year halo effect on the distributions to your loved ones when they inherit the Roth assets. But if you're like me where I have a child that is classified with a specialty that will allow me to continue the stretch on her life as well, these things can be turbocharged from a legacy and an estate planning that stuff.

needs to be taken into account too. I know that it's cool that there's things in the tax code that allow you to create a bridge or a unique loophole, but make sure you're taking into account the full scope of what your needs will be in life so that you build what your personal journey is going to look like. So it can be maximized not only as you retire, but also even beyond your retirement, even beyond your life. And that's why we always like to point you to the financial order of operations. If you want to know more, if you want to do a deep dive, you can go to learn.moneyguy.com. Check out our financial order of operations course because what that's going to allow you to do is understand what should I do with my next dollar. And odds are if you follow the financial order of operations and you allow it to be your guide when you get to retirement, whether it is an early retirement or whether it's a late retirement, you're going to have options to where you can

optimize the situation for what makes the most sense for your goals and your needs. Follow the food, and it will not lead you astray. And then a lot of you are probably watching this be like, hey, this sounds like there's some nerdy stuff going on here. We named quite a few rules, tools, and distribution things that you can get around and work with. They're all going to be tools in your big toolbox of how you maximize your retirement journey. But here's the reality. You've only done this once. You're doing your first one. You're green behind the ears, trying to figure out how does this all work, how do I not screw it up. You don't have to do this alone. Why not engage and work with somebody who's done this hundreds of times, thousands of times for their clients. This is something that you ought to think about. When do you take the relationship to the next level? Look, I love creating content, and I tell the majority of our audience, if you don't feel like your life is complex, keep it.

simple keep taking all of our free stuff. Load it up. Go for it. But there will come a time you don't even have to look for it. It's just success creates complexity, and you're going to start to feel overwhelmed. You're going to feel like there's blind spots. You're not going to know how to maximize it, and you're going to say, I would love to find someone to make sure that this journey is optimized for me, so I own my time that much sooner, but also good to enjoy my time and let somebody else worry about pulling the levers here and there to maximize. And that's exactly what we do with the abundance cycle, and we're here to help you out. We love that we can be this resource for you. Financial Independence is an amazing thing to work towards, and we're going to keep loading you up with information so that you can do money better and reach your abundance. Hey guys, remember, respect that Foo, maximize your life 'cause money is only a tool. I'm your host, Brian Preston, Mr. Bo.

3 Ways to Retire Early (That You Might Not Know About)

Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life.

Subscribe today to stay up to date with our latest episodes, livestreams, and highlight videos: https://www.youtube.com/c/MoneyGuyShow?sub_confirmation=1

Are you ready to go beyond common sense when it comes to your money? Check out all the free resources The Money Guy Show provides: https://moneyguy.com/resources/



The Money Guy Show

Retirement accounts are still important for early retirement to bridge the gap between early retirement and the age of 59 and a half.

Taxable brokerage accounts can provide favorable tax rates for early retirees as an alternative to traditional retirement accounts.

It's crucial to consider the age of 55 and 59 and a half when planning for early retirement and to explore the option of Early Access to retirement accounts for tax advantages.

Pros and Cons of Taxable Brokerage Accounts and Early Retirement Using Retirement Accounts

Taxable brokerage accounts have no age or income limits for opening and funding, with no contribution limits and no withdrawal restrictions, offering flexibility and favorable tax rates on long-term capital gains.

However, they require the payment of income taxes in the year money is earned, which is a downside compared to tax-free or tax-deferred accounts.

On the other hand, the "rule of 55" allows penalty-free access to 401k retirement assets if the individual retires in the year they turn 55, providing a powerful tool for early retirement.

It's important to have the retirement assets in the current employer's 401k plan to take advantage of this rule.

Maximizing Retirement Assets: The Rule of 55 and 72t Distributions

The Rule of 55 allows penalty-free access to 401k funds at age 55, but it's more advantageous for traditional 401ks than for Roth 401ks.

It provides simple and immediate access to the full account balance, with the potential for tax advantages in a lower income tax bracket in retirement.

On the other hand, the Rule of 55 requires research to ensure the employer's plan allows it, is limited to the current 401k, and demands careful attention to the specific age requirement to avoid penalties.

Meanwhile, 72t distributions offer a more complex strategy for early retirement, allowing substantially equal periodic payments to access retirement funds before the age of 59 and a half, but it requires careful planning and adherence to specific IRS rules.

Understanding the 72t Distribution for Retirement Accounts

The 72t distribution allows for penalty-free withdrawals from retirement accounts before the age of 59.

There are three payment methods available: the RMD method, the amortization method, and the annuitization method.

Once chosen, the distribution method is locked in for five years or until the individual turns 59.

5, requiring careful consideration and planning.

The 72t distribution can be a complex but attractive option for accessing retirement funds early, especially for those with a longer retirement window, but it requires careful financial calculation and planning.

Pros and Cons of 72t Distributions and Roth Conversion Ladder for Early Retirement

The 72t distribution offers a straightforward accumulation process and tax advantages for those in a higher tax bracket, but it comes with complexity, risk, and little flexibility, making it less practical for funding retirement living expenses.

On the other hand, the Roth conversion ladder is a popular strategy for early retirees to access Roth dollars earlier, providing a way to work around the tax-free growth limitation until the age of 59.

This strategy allows for the conversion of pre-tax assets into Roth, offering unique means of accessing tax-free growth and Roth basis after the 5-year waiting period.

Maximizing 401k Contributions: A Tax Strategy

You can contribute up to $223,000 to a pre-tax 401k and then convert a portion to a Roth, allowing penalty-free and tax-free withdrawals after five years.

The strategy can be advantageous if you expect to be in a lower tax bracket in retirement, but the 5-year delay and the need for after-tax assets as a bridge account can be drawbacks.

There are no income limits on the conversions, but it may not be the best strategy for everyone, especially those with large after-tax assets.

Maximizing the Benefits of Early Retirement: A Personalized Financial Strategy

Delaying Roth conversions allows for longer tax-free growth of retirement savings.

The best retirement strategy depends on individual factors such as financial situation, lifestyle, and goals.

A personalized approach that combines different strategies, such as saving in retirement accounts, building after-tax assets, and executing Roth conversions, is often most effective.

Consider the full scope of your needs in life to maximize your personal financial journey, including retirement and beyond.

The financial order of operations can guide you on what to do with your money and optimize your retirement goals.

It's beneficial to work with someone experienced to navigate the complexity of financial planning and maximize your journey towards financial independence.