Early Retirement vs. IRA

starshard0 · 12-10-2008, 01:39 PM

My current plan to retire involves me saving up a million dollars by the time I'm 35, however, I'm also aware that I can't touch the money in my IRA until I'm nearly 60. With that in mind, should I still invest into an IRA?

Philip Brewer · 12-10-2008, 02:43 PM

There are a couple of issues here.

First of all, it is possible to withdraw money from an IRA early without penalty, if you follow certain rules--which, happily, are designed for situations exactly like yours (someone who's actually retiring early and want to live off the IRA money). You need to look up your life expectancy in an IRS table and then calculate a withdrawal rate that will exhaust your IRA over the course of your remaining lifetime. You can then start withdrawing the money penalty-free. Once you start, you have to continue for at least 5 years (a rule intended to prevent people from just yanking out a few thousand dollars for a major purchase by pretending that they're planning to retire and then pretending that they've changed their mind). The rules are complex and include several gotchas, but if you follow them, you can use your IRA money to retire at any age.

As a practical matter, though, you're not likely to be able to save a million dollars in an IRA by the time you're 35--the contribution limits are just too low. But that's okay. Someone determined to retire by age 35 will probably be maxing out their 401(k) and their IRA and putting some money aside in regular savings and investments. That last category will give you some money to work with that isn't encumbered by tax rules. If you just have 10 or 15 years to work with (until you're 35) your IRA will probably make only a small contribution to your total wealth, but the tax advantages are still significant.

I talk about this in my post When NOT to put money in your 401(k).

starshard0 · 12-10-2008, 02:56 PM

Well that's certainly good to know. I don't plan on soley contributing to my IRA for the million, most of it would be through other investments, but knowing that I can let my money grow sheltered from taxes and still have access to it when I retire early is wonderful.

Philip Brewer · 12-10-2008, 03:04 PM

The IRS thinks of everything.

12-10-2008, 01:39 PM	#1
starshard0 Senior Member Join Date: Apr 2008 Location: Monterey, CA Posts: 608 Thanks: 0 Thanked 1 Time in 1 Post Reputation: (12)	Early Retirement vs. IRA My current plan to retire involves me saving up a million dollars by the time I'm 35, however, I'm also aware that I can't touch the money in my IRA until I'm nearly 60. With that in mind, should I still invest into an IRA?

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12-10-2008, 02:43 PM	#2
Philip Brewer Wise Bread Blogger Join Date: Jul 2007 Location: Champaign, IL Posts: 182 Thanks: 1 Thanked 6 Times in 4 Posts Reputation: (27)	There are a couple of issues here. First of all, it is possible to withdraw money from an IRA early without penalty, if you follow certain rules--which, happily, are designed for situations exactly like yours (someone who's actually retiring early and want to live off the IRA money). You need to look up your life expectancy in an IRS table and then calculate a withdrawal rate that will exhaust your IRA over the course of your remaining lifetime. You can then start withdrawing the money penalty-free. Once you start, you have to continue for at least 5 years (a rule intended to prevent people from just yanking out a few thousand dollars for a major purchase by pretending that they're planning to retire and then pretending that they've changed their mind). The rules are complex and include several gotchas, but if you follow them, you can use your IRA money to retire at any age. As a practical matter, though, you're not likely to be able to save a million dollars in an IRA by the time you're 35--the contribution limits are just too low. But that's okay. Someone determined to retire by age 35 will probably be maxing out their 401(k) and their IRA and putting some money aside in regular savings and investments. That last category will give you some money to work with that isn't encumbered by tax rules. If you just have 10 or 15 years to work with (until you're 35) your IRA will probably make only a small contribution to your total wealth, but the tax advantages are still significant. I talk about this in my post When NOT to put money in your 401(k).

12-10-2008, 02:56 PM	#3
starshard0 Senior Member Join Date: Apr 2008 Location: Monterey, CA Posts: 608 Thanks: 0 Thanked 1 Time in 1 Post Reputation: (12)	Well that's certainly good to know. I don't plan on soley contributing to my IRA for the million, most of it would be through other investments, but knowing that I can let my money grow sheltered from taxes and still have access to it when I retire early is wonderful.

12-10-2008, 03:04 PM	#4
Philip Brewer Wise Bread Blogger Join Date: Jul 2007 Location: Champaign, IL Posts: 182 Thanks: 1 Thanked 6 Times in 4 Posts Reputation: (27)	The IRS thinks of everything.