Family of Four Taking Flight to Financial Independence

You Can Access Your 401k Early (What Steps Does It Take?) (Part II)


In July we brought you ... You Can Access Your 401k Early (Part I), and now it is time for another option to access your 401k early (Part II).  So now we bring you ...

Shortcut To Penalty-Free Early Withdrawals From Your 401K (Part II) (The version that might give you a headache (but will be worth it)).

Tara and our youngest got more travel shoes (Vivobarefoot).  What the shoes say fits in well with our plans.  Read on for the steps to access your 401k early. 



In Part I of this post we talked about accessing your 401k early (before you turn 59.5) by using the Roth IRA Conversion Ladder.  

In Part II we are going to discuss what is known as the SEPP 72t.  This strategy is slightly more involved (in my opinion) than simply setting up a conversion ladder and waiting 5 years to pull it penalty free; however, it does have some perks.

What is a SEPP 72t?

SEPP stands for Substantially Equal Periodic Payments.  This option is a little trickier to set up than a Roth IRA Conversion Ladder, but it could prove to be worth the extra effort if your goal is to get the most bang for your buck from your retirement funds (and honestly, who doesn't have that goal?).

If you choose to use SEPP 72t as your early withdrawal strategy, you will have 3 methods of withdrawal to choose from: 

1) The Required Minimum Distribution Method or
2) The Amortization Method or
3) The Annuitization Method

On top of choosing which method is right for you, you will also have to choose a life expectancy table (aka – how much longer do you plan to live?), and you may have to choose an acceptable interest rate as well (if you choose method 2 or 3 from above list). 

Sound confusing?  That’s because it is!  But don’t write off this strategy just yet.  If you are interested in learning more about this from the experts, check out this link from our good friends at the IRS.  It will go into detail about each method. 

Can you give me a quick overview?

Honestly, this method is still confusing to me at times, but here goes.

Step 1: Retire early, and immediately roll over your 401k into a traditional IRA. 

Step 2: Determine the withdrawal rate you want to take from your retirement accounts.  This could be anything, but typically this is where the 4% withdrawal rate would come in to play.

Step 3: Get in touch with a tax professional at the firm that holds your IRA (for us this would be Vanguard) and have them walk you through each of the 3 methods mentioned above.  You can then choose the method that comes as close as possible to the withdrawal that you determined in Step 2. 

As an aside, I have spoken with an accountant who has worked with many early retirees and has experience with the SEPP 72t.  He highly recommends Vanguard and their tax professionals when dealing with a SEPP 72t.  His exact quote when he found out I would be working with Vanguard when the time came to potentially set up an SEPP 72t was, “Oh!  You didn’t say it was Vanguard.  You are going to love those people.  They have an awesome staff dealing with this stuff.”  I tend to agree.

Each method above also has different rules, so depending on which one you choose you may need to adjust your withdrawal amount every year.  Your tax professional (aka Vanguard) will be able to explain this to you.

You will also have the option to change the method you choose one time, so be sure you are happy with what you pick. 

Step 4: Withdraw your desired amount every year.  This will also be included as taxable income in the year that you withdrawal it (whereas with the conversion ladder, you get taxed 5 years early).

Step 5: Continue with your withdrawals for 5 years or until you reach 59.5, whichever is longer (for us, assuming we retire around the age of 40 and start a SEPP 72t, we would need to continue with our withdrawals until the age of 59.5).

You are subject to major penalties if you stop withdrawals or withdrawal the incorrect amount (please don’t do this).  

Pros

You can access your retirement funds now, so you don’t have to wait for five years like in Part I of this series.  

You are taxed on the withdrawal the same year that you withdrawal it, thus allowing your money to grow tax free for as long as possible.  

You can have a tax professional help you set everything up! (Ahem, Vanguard!)

Cons

You must continue the withdrawals until you reach 59.5 whether you need the money or not.  (Note, this doesn’t say you have to spend the money).

If you mess up on your withdrawals you could face some penalties (again, please don’t do this).

You have to have a tax professional help you set everything up!  I know, I have this one listed twice, but that’s only because a lot of people loathe the idea of asking for help (especially when dealing with money) so this may seem unappealing to some (not to me though).

What do we plan to do?

We have another year or so before we have to decide this, but as of now I am strongly leaning in favor of using the SEPP 72t and having it set up to withdrawal around 3.5% per year.  This would mean that we choose the Amortization Method (option 2 above).  This will largely be determined on how easy it is to have everything set up with Vanguard.  We won't know for sure until the time comes.  

The main reason we are leaning towards the SEPP 72t over the Roth IRA Conversion Ladder is because I like the idea of having access to the funds right away (whereas with the conversion ladder we would need to tap into our cash account (or have side income) for the first 5 years of retirement).  Personally, I have other plans for our cash account.  I also like the long-term tax implications of being taxed in the same year that you withdrawal the money.  

So what do you think?  Do you have a headache yet?  Is this strategy something you would consider?

-Erik

Travel: Paradise (Anguilla)


Anguilla - Zemi Beach House Hotel & Spa 

Ahh, paradise.

Before we get to paradise ... a few things.

This blog isn't only about our journey to FI (financial independence) and achieving / living FI, but it is (and will be) also about travel, family, the arts, education (and more?!).

The idea of being frugal is a big topic in the FI community, but also some have the perception (in and out of the community) that being FI is about being as cheap as possible (in order to save as much as possible).  That is not the case (at least not for us!).  Yes, being frugal about certain things is important to us in order to achieve and sustain FI ... but it is also about spending on things that matter (for us family and travel is a big part of that).

With that said, my most recent trip with our youngest child was a treat for us in return for watching our nephews.  And if spending on a luxury resort on a beautiful island is on your list, I would highly recommend saving and splurging on Anguilla and Zemi Beach House Hotel & Spa.

Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).

During and after our most recent trip some things have been on my mind ...

You Are Doing What?!

As we get closer in our journey to FI, more people are hearing about our plans ... and maybe even believing our plans more.  Like we have mentioned, at this point ... we plan to move to Spain for at least a school year (but most likely more).  I think the 1) idea of FIRE (retiring early) is foreign to many ... and the 2) the idea of leaving the United States is just as "out there" for many people.

(Honestly the idea of FIRE was crazy to me at first too.  So, I get it.)

I've heard many similar (and not surprising comments) ... some negative and some positive.  And I think people are generally curious and well-meaning ... anything from "what about work?"... "won't you get bored?" ... "so awesome!  and brave!" ... "great experience for both of you and the kids!"

But now I am to the point of ... the idea of FIRE and traveling the world with the kids is THE MOST normal idea for me / us right now ... and anything else (for us!) seems crazy to me.

Paradise

Back to paradise ... my youngest and I took a recent trip to Anguilla (British West Indies) for 5 days (to help my sister and her family with my young nephews as they went to many wedding events for friends).

She made special Anguilla shirts for the cousins that my sister had printed.

If you are looking for a trip to paradise in the Caribbean, we highly recommend Anguilla.  Anguilla's beaches are often rated some of the top in the world.  If you are also seeking a luxury hotel and spa, we also highly recommend where we stayed - Zemi Beach House Hotel & Spa.

Really there is no reason to leave the resort area unless you want to enjoy an excursion or two (which I would recommend at least one!).

Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).


Anguilla - Zemi Beach House Hotel & Spa (Our suite's private pool).



Anguilla - Zemi Beach House Hotel & Spa (Where we ate many of our meals).


Angulla - Zemi Beach House Hotel & Spa (Main Pool)


Anguilla - Zemi Beach House Hotel & Spa (Main Pool)



Beautiful beach with white sand and clear blue waters?  Check.

Pool time?  Check.

Great food and beverages ... from casual to fine dining?  Check.

These are the main three we enjoyed, but they definitely had more to offer from Kids Club to a Spa ... and more.

Our excursion ... Jr's Glass Bottom Boat ... 

Anguilla - Little Bay

Anguilla - Little Bay




We did enjoy one excursion with the whole family which was perfect for the kids (ages 6, 3, and 1 years) - a private tour with Jr's Glass Bottom BoatJunior was great, and he stopped at two places including Little Bay.  The kids were able to play on the beach / shallow waters (and snorkeling is also available).  At the second stop my child tried snorkeling for the first time with her Uncle!  And of course we all got to enjoy the deep blue sea from the glass bottom boat window (the sea turtles were definitely a highlight).

Travel Gear: How Do You Travel?

We spied Britto's art / shop at the Miami airport (I did a lesson on Britto in art class this year for Feb / Valentine's Day).



My youngest and I enjoyed our recent travel adventure.

We loved the journey there and back and of course our time in Anguilla with family.

Our journey there included two planes (layover in Miami before we landed in St. Maarten) ... a van, a boat, and then another van.  Exhausting day of planes, trains, and automobiles?  Yes, but we had the mindset it was all a part of the adventure!  Things got more interesting as we made a friend once our final plane landed, and he joined us on the final journey (he was going to the same location / wedding).  He was entertaining (turns out an actor so I guess being entertaining would be a strength!), from the UK originally, and great with kids (which helped me!).


Boat Ride Transportation (St. Maarten to Anguilla).  She got a very RARE Coca-Cola treat.   Tortuga bag beside her.

And the same thing happened for us on the way home ...

The trip home was even MORE of an adventure (and a longer day).  Golf cart, van ... to a small private plane (Anguilla to St. Maarten).  St. Maarten to Charlotte ... (ran to our next flight after Immigration / Customs) ... and then finally landed late that night in Houston.  Our last flight we made another friend (a nice lady from South Carolina who was traveling to Houston for work) that I talked to the entire flight while the little one slept.  I'm not normally into talking to people on planes, but our conversation worked out nicely and made the trip go by more quickly.

Who have you met on your travels?

It also helped that we traveled light, and we plan to do the same on our way to Spain.

We brought one Tortuga Backpack (Setout Divide) for both of us that I wore / carried on the plane.  We own two, and we plan to buy two more for Spain for the kids (or slightly smaller ones).

Wearing her Tortuga Setout Packable Daypack.

My youngest and I also brought our Tortuga Setout Packable Daypack for easy access of items under our plane seat (and for daily use).  (We own two and plan to buy two more before Spain and other travels).

What are your necessities in your carry on?  Do you try to travel light?  One of my newest accessories is this Bag-All pouch for Passports and Travel Stuff (thanks, sister!).  Not only is it useful ... great simple design, and it's created by a small business in NYC (Bag-All).  I first discovered this store while walking in NYC (it's on Mott Street in Lower Manhattan).


What are your favorite travel necessities?

... so there you have it.  Paradise.  My thoughts on travel.  And some travel ideas / gear.

Anguilla

Anguilla - Zemi Beach House Hotel & Spa

Where is paradise for you?  Would you leave life as you know it to travel?  What things or strategies make traveling easier for you?

-Tara