If you are planning an early retirement, should you participate in a 401k, and what should you do with your 401k if and when you do retire early? Here are Early Retirement 401k Strategies, which answer these questions, and also what to do if you are forced to withdraw from your 401k.
Should I Contribute to a 401k if I Plan to Retire Early?
The answer is yes on two conditions, your employer offers matching contributions to your 401k, and your 401k is not your only source of retirement savings.
If your employer offers 401k matching, for instance, 50 cents for every dollar you contribute up to 6% of your salary, you are getting an instant 50% return on your savings. You would be a fool to pass up the opportunity to receive tax deferred free savings. If your employer does not offer 401 k matching, there is no advantage in participating in a 401k, and it could make an early retirement more difficult to achieve.
If you are planning to retire early, even if you receive employer 401k matching, your 401k should not be your only retirement savings strategy. Why? Because if you choose to, or are forced to, retire before age 59 1/2, you will face penalties and taxes if you need to withdraw your 401k funds.
Take advantage of employer 401k matching, but make sure you are saving outside your 401k, even if you are not planning to retire early. Also, always maintain a proper overall asset allocation model, combining both your 401k and non-401k retirement savings.
What Should I do With My 401k if I Retire Early?
Ideally nothing. The best strategy is to not tap your 401k funds, until you have turned 59 1/2, to avoid penalties and taxes for early withdrawals. If you have retirement savings outside your 401k, withdraw from those sources first, before touching your 401k.
What if I Have to Withdraw From My 401k Early?
If you have to withdraw funds from your 401k early, because you were laid-off and forced into early retirement or for whatever reason, investigate I.R.S. Rule 72(t), to see if you qualify, and can avoid paying the 10% penalty for early 401k withdrawals. Here is a free Rule 72(t) calculator to help you determine the amount you can withdraw penalty-free.
While 401k’s do complicate early retirement planning, following these strategies will help you take advantage of 401k matching, and avoid early 401k withdrawal penalties.
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