Retirement accounts and money to spend
Everybody knows that retirement accounts like 401(k)s and IRAs offer great tax advantages (and once upon a time--and maybe again someday--a corporate match). But people who have plans to spend the money before they reach retirement age worry about the restrictions on early withdrawals that come with the various retirement plans. Here's a cheat-sheet for working the angles.
There are two different points where you need to do your considering: when you're making your saving and investing decisions and are thinking about where to put the money, and then again when you're making the spending decisions and are thinking about where to take the money from.
Start your thinking by dividing your goals for the savings (other than retirement at full retirement age) into three categories: major purchases, emergency funds, and early retirement.
Your retirement accounts are generally a poor choice for money that you're planning to spend on things like buying a house or a car, sending the kids to college, or taking a lavish vacation.
You can borrow from your 401(k) for the down payment on a house, but you're combining the big problem with such borrowings (losing your job means you have to pay the money back in 60 days or owe taxes and penalties) with a big bite out of your retirement savings.
Better is to save for these goals outside your retirement plan. In some cases (such as college savings) there are other tax-advantaged plans that are better suited for the purpose.
One special case is funding your own college expenses. You don't have to pay the 10% penalty on money that you withdraw from an IRA to pay your own college expenses, so an IRA is a perfect place to save money if you're planning to go back to college.
Money in your retirement account is available to handle emergencies to a very limited extent. Generally, it's available two different ways. You can borrow against your 401(k) and you can withdraw your contributions (but not your earnings) from a Roth IRA once the plan has been established for 5 years.
Making use of either of these options is generally a bad idea--but in an emergency, sometimes it's a matter of bad versus worse.
You ought to have an emergency fund that's not in retirement accounts. But it's worth understanding that the money isn't completely unavailable, especially if that makes it easier for you to put a bit more aside.
Here's where way too much brainpower has been wasted by people who plan to retire early and worry about coming up with cash to fill the gap between the date they retire and the date they can start taking money out of their 401(k) or IRA.
First of all, if you're really retiring, you can take money out of your retirement account. There are rules to follow--you have to arrange to take a series of payments calculated to last the rest of your life--but that's exactly what you'd want to do if you were actually planning on living on the money.
Second, if your goal is to retire early, you're almost certainly going to be hitting the maximums on your retirement accounts and having to save some after-tax money anyway.
The upshot is that maximizing your retirement savings is entirely compatible with early retirement. It probably won't be enough for early retirement, but maxing out every retirement savings option you've got is a great start.
I wrote a while back out what order to max the accounts out in.