Retirement Accounts: Benefits and Considerations

Early retirement may still require post-59.5 funds, making retirement accounts advantageous despite tax analysis and changing rates.

### The Importance of Retirement Accounts for Early Retirees
* 💰  Even if you plan to retire early, it's important to consider retirement accounts like 401(k)s and IRAs due to **potential post-59 1/2 financial needs** and **tax optimization opportunities**.
* 📊  Tax rates are not static; they change over time and are likely to **decrease post-retirement**, making early tax planning crucial for **maximizing savings**.
* 🎯  Knowing key ages (**55 and 59 1/2**) is essential for early retirement planning, as these ages can impact **access to retirement funds without penalties**.
* 🏦  Taxable brokerage accounts are a popular choice for early retirees as they offer **flexibility** and **lower capital gains tax rates** compared to traditional retirement accounts.
* ✅  Pros of taxable brokerage accounts include **accessibility (no age or income limits)**, **no contribution limits**, and **no withdrawal restrictions**.
* ❌  Cons of taxable brokerage accounts include **immediate taxation on earnings**, unlike Roth accounts which **grow tax-free**, and the need to hold investments for at least a year to qualify for **lower long-term capital gains rates**.
* 💡  It's important to strike a balance between **taxable brokerage accounts** and **retirement accounts**, as each has its own **advantages and limitations** for early retirement planning.
* 💸 " Current year income, whatever these taxable brokerage 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.

[Music] Um, 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, uh, 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. 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 and 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 and 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-er? I think a lot of people, they think when they do tax analysis, they assume that

everything is static and it STS, 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. And 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. And we're going to talk about some of those in retirement accounts. But I think it's worth mentioning before we dive in there. 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 benefits on the front end of taxable brokerage accounts, one of the 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 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 brokerage 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.

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. It 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 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 these individual investments or securities at least for a year. So it's subject to long 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 brokerage 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 that there's Roth assets that grow completely tax-free, 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.

Why Retirement Accounts Still Matter for People Retiring Early

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

The Importance of Retirement Accounts for Early Retirement

Retirement accounts are still important for early retirement to have money post 59 and a half and take advantage of tax opportunities.

Tax rates are not static, so optimizing retirement accounts can create a better tax opportunity, especially during lower-earning retirement years.

There are ways to get early access to retirement accounts with tax advantages, making them a valuable option for early retirees.

Using Taxable Brokerage Accounts for Early Retirement

Key Dates for early retirement planning are age 55 and 59 and a half, which determine access to retirement funds.

Taxable brokerage accounts offer the benefit of favorable tax rates on growth and transactions, unlike traditional retirement accounts.

These accounts provide flexibility for early retirees, as they have no income or exclusivity limits for opening and funding.

The Benefits and Drawbacks of Taxable Brokerage Accounts

Taxable brokerage accounts are highly accessible and have no contribution limits, making them easy to fund for anyone with the financial margin.

These accounts also have no withdrawal restrictions, allowing for flexibility in accessing funds at any age.

However, while they offer favorable tax rates on long-term capital gains, the downside is that they are not without drawbacks.

Taxable brokerage accounts require the payment of income taxes on earnings in the current year, unlike Roth assets that grow tax-free.

This can be a disadvantage compared to tax-deferred accounts, where taxes are paid at ordinary income tax rates when the money is withdrawn.

It is important to consider your tax rates when choosing the right investment account.