Today, guest host Jeremy Schneider talks about retirement accounts.
Specifically, he shares why having all of your money locked up in them is a problem and how to access your funds early.
He also answers a listener question about where to prioritize investing in a 403(b).
If you have any type of retirement account (e.g., IRA, 401k, etc.), you don’t want to miss this episode.
How to Listen to Today’s Episode
Episode Links & Resources:
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- Jeremy Schneider
- Six Ways to Access Retirement Funds Early
6 Ways to Access Retirement Funds Early
Taylor Schulte: Welcome to the Stay Wealthy podcast with Taylor Schulte once again and for the last time this year, this is not Taylor Schulte. My name is Jeremy Schneider. I'm guest hosting for Taylor just for the month of June, giving him a break as he is I assume with his young newborn child.
I'm actually recording this episode at the end of May, but Taylor should be just finishing up his month of paternity leave as he is helping his wife and his other two children get on their way with their new now much larger family, not much larger. The baby probably wasn't that big if I'm guessing I'm gonna say eight pounds. I got eight pounds in the pool, but yeah, that's what Taylor's and he'll actually be back next episode in the beginning of July.
You can find the show notes and links for this episode at youstaywealthy.com/115.
So I talk a lot about investing. I have a popular Instagram at Personal Finds Club and one of my most popular posts is a very simple investing checklist that basically lists all the accounts that I basically suggest investing in and the order in which you prioritize those accounts. This basically applies to like pretty much typical employees. If you're self-employed or you're a business owner, your list will be a little bit different. But if you're a regular employee with a 401K or 403b, your list basically looks like this.
The first priority is to invest in your 401K or your 403b or your other employer-sponsored retirement plan up to the employer match. If your employer is giving you some money, you always take advantage of that first.
The second step is actually if you're going by the tax advantage, it's actually the HSA, the health savings account, which offers a triple tax benefit that actually no other retirement plan offers. Money goes in, tax-free money is tax-deferred as it grows and actually spending from that account is also tax-free, assuming it's on a qualified medical expense.
You can only have that account if you do have a qualified medical plan, a high deductible health plan that's HSA compatible. If it doesn't apply to you by the way, you just skip that. The third place to stop is your ira. Generally for most younger people, at least a Roth IRA that you can put up to $6,000 per year in a Roth IRA.
The fourth step in of priority is actually back to 403b you could put up to $19,500 per year in a 401K or 403b. The reason I prioritize HSA and Roth IRA ahead of filling up the rest of your 401k after the match is basically because 401ks often have higher expenses and less optimal investing options, whereas IRAs have, you can open them with your own account with Vanguard, Fidelity, Schwab and you have unlimited investment options.
And then the fifth and final step is just a regular taxable brokerage account, which has an unlimited contribution limit. You can put any amount of money in it in the brokerage account and the only downside to that is that you are taxed on the growth, whereas you wouldn't be in like a Roth IRA for example.
So the list is ordered like that to optimize for the match first and then tax advantage and minimizing fees. Second, the first four items on that list though come with strings. Those are basically special brokerage accounts offered by the federal US government to encourage us to invest so that we are not a bunch of broke old people, but we have money in retirement and we're not fully reliant on social security, but those strings attached in all cases basically include you can't have this money until you're 59 and a half.
And there are some exceptions like for first-time home buyers or qualified medical expenses. Of course with the HSA it actually converts to a regular retirement account at 65, 401ks and IRAs are 59 and a half. But generally there are strings attached and somewhat sometimes complicated rules.
One of the questions I get asked the most, I get asked this question a million times goes like this, but Jeremy, what if I don't wanna have my money locked away until I'm 59 and a half? Or what if I want to retire early? Which I love that question. I love the mentality why wait until you're 59 and a half or 65 or 75 to retire? If you've got enough money at 45 and you can live on your investments forever, why not do that and spend your time, do what you love or start a business or whatever.
Basically people don't want their money locked away. And so in this episode, I'm basically gonna give you six ways to access your retirement funds early.
First, just as a baseline, I've never actually seen this problem, I get asked this question a million times, but I've heard from someone suffering from this problem zero times. I think it's like a big concern to very young investors who are worried about having their money locked away, but people who are nearing retirement amount of money or nearing retirement age kind of have enough visibility into where they're going and how they're gonna withdraw money that it actually didn't end up being a prom.
So first, I've never actually seen the prom second in the most extreme case, the penalty for early withdrawal is 10%. So it's not like this money is locked away under lock and key and you can never access again. If you had saved up $2 million in all in 401ks and IRAs for example, and you wanna retire early, like let's say you're 40 and somehow you have $2 million in a 401K at 40 you can, you could take it all out that day and pay a really hefty 10% fee, 10% penalty, that'd be $200,000 to the government. But you'd still be left with 1.8 million depending on before or after tax, depending on if whether it's Roth or traditional. But broad strokes, you'd still have about 2 million bucks.
So, and this is if the most extreme scenario where you take it all out in one single day and you pay the entire fee and every single dollar, that's not a realistic scenario. So again, just as a baseline, what we're talking about is just ways to optimize not paying that 10%. Okay, so here we go. Here's your six ways to access retirement funds early.
Number one, your taxable brokerage account. So in that five-step list I just gave, number five was a taxable brokerage account. Generally early retirees who have so much money, they no longer need to work, have a lot of money in a taxable brokerage account. You've filled up all those other accounts and they've overflowed you can't put any more money in. And then you have just start putting money into a regular taxable brokerage account.
You can take that money out anytime, totally penalty-free. It's just like any sort of bank account. You owe tax on the gains, which is not as preferable as not owning tax on the gains, but it's got ultimate flexibility. It's just a regular account that you have. Personally I have my net worth is about $4.1 million at the moment and other than my home, 95% of my net worth is in a taxable brokerage account because I made all my money at once and then my money doesn't fit all inside of the retirement accounts.
And so I'm one of those younger retirees who doesn't have that problem because of the taxable brokerage account.
Way number two to access retirement funds, early investment real estate. Most wealthy people who can retire early end up buying some property, they buy a duplex or they're invested in a big apartment community or whatever it is that's providing income. That income is generally not in a retirement account. It's possible for it to be, there's such thing as like a self-directed IRA where you put your property inside of an ira, but generally real estate investors like the tax benefits of real estate with a depreciation and they like the cash flow from real estate with the money coming out of it. So that's a second way that you're probably gonna have access to money if you are really an early retiree.
Number three, your Roth IRA principle or your Roth 401K principle. The rules of the Roth accounts are any money that you contribute, you can take out any time tax penalty-free. So let's say for 20 years you're putting in 6,000 bucks a year. That's $120,000 that you've put in over the course of 20 years. You can take out that $120,000 tax penalty-free. If it's a Roth 401k, that number would be much bigger because there's a $19,500 limit on that. And if you are so wealthy, you can retire so young, you basically were very likely to be filling up these accounts.
Way number four, to access retirement funds early, a Roth conversion ladder so IRAs can be their Roth or traditional, same with 401ks and if you leave your old employer you can roll your traditional 401K into a rollover IRA and then you can also do what's called converting. So you can convert a traditional IRA into a Roth ira.
When you do that, all that money becomes Roth money and the government has said, Hey wait a minute. I know we have a rule about letting you take out the principle, the thing I just talked about way number three, but if you're converting it, that kind of seems like cheating, but we don't really know where to draw the line between giving you access to all the principle and letting you take all of it out.
So we'll just say there's a five-year waiting limit. And so it's basically a five-year rule. It says if you convert from a traditional to a Roth IRA after five years, you can take all the money out of the Roth ira. And so a Roth conversion ladder is to basically convert a little bit of your traditional money to Roth every single year and then five years later you're living on the money from five years ago.
And so if you're within five years of retirement, this might be something you that you would have eyes on. Again, like I don't really know anyone who does this, but usually people have enough in their taxable and investment accounts, they really are an early retiree. But if you just were a really high-income young person throwing tons of money into a traditional 401K and traditional IRAs, well actually you probably couldn't do both. But in a 401K for example, then yeah you could do this Roth conversion later. That's of way number four.
Way number five to access retirement funds early is what's called the rule of 55. That rule is basically a law from the IRS that says an employee who is laid off, fired, or quits between the ages of 55 to 59 and a half basically gets full access to their 401K without any penalty.
I don't know why that exists to be honest. Like why not just make the age 55? I think if you quit before 55 doesn't count. I think that that has to happen between 55 and 59. Maybe there are some people who were fighting age discrimination and were having trouble finding employment in their second half of their fifties and just wanted to access their 401k and the IRS said, fine, if you get fired you can have it. But yeah, that's another way.
So if you're between 55 and 59 and you leave your job basically for any reason laid off, fired, or quit, you have full access without penalty to your 401k.
And way number six, to access retirement funds before you are 59 and a half, it's called Rule 72 T. You can Google it. That's what I did. It's basically a law specifically designed for early retirees that gives you access to IRAs and other tax advantage accounts with no penalty. There are some rules.
Basically you have to take at least five of what are called substantially equal periodic payments. And the amount depends on the amount of these payments depends on your life expectancy as calculated through IRS-approved methods and those substantially equal periodic payments. Sorry if I'm saying my Ps too loud on the microphone. I know that can get kind of loud on a podcast, but I'm saying a lot of Ps right now.
But those five periodic payments must occur over the span of five years or more or until the owner is 59 and a half, whichever is longer. So basically it's just, it's like this big entryway to say, hey, if you really have so much money in these accounts and you are gonna retire early, then you can start taking these substantially equal periodic payments over like a long period of time. It's specifically written like that.
So it works for living expenses for retirees. It's not meant to like drain your account and buy a boat or something when you're 30. It's meant to like spread out and like just have access to that. But yeah, for sure if you're trying to get to your money early, cuz you're an early retiree, there it is rule or way number six to access your mind.
So the takeaway here is that I personally would always prioritize those tax-advantaged accounts because having too much money in those tax advantage accounts is a very good problem to have and as I just demonstrated, hopefully there are ways around it if you really do end up with too much money and even like the most extreme scenario of having to pay the penalty isn't, it doesn't leave you broke or something, it just is giving too much money to the government. So there you have it. If you do have the ability to contribute to those tax advantage accounts, I always would. The tax break is generally worth it.
Okay, the question of the day is from Mackenzie from Los Angeles. Let's listen.
Mackenzie: Hi Jeremy, this is Mackenzie and I have a personal finance question for your podcast. I have the opportunity to invest at work into a 457b and my understanding is that that operates a little differently than a 401K and an IRA. I am trying to reach fire like to retire early with financial independence and I'm wondering how I should prioritize the 457b.
Typically people say get the match and then move on to your IRA and then go back to your 401k. But I'm wondering if it's more advantageous to stick more of my money into the 457b because of the benefits that it offers for early retirement withdrawals. Thank you.
Jeremy Schneider: Thank you for the question Mackenzie. So for those who are wondering if 457 is indeed yet another type of employer-sponsored retirement account or retirement plan, I think it's basically only offered to state employees. And so if you work for a school district or a fire department, maybe some hospitals you might get a 457 and indeed Mackenzie's right, there's basically no early withdrawal penalty on 457s. They're great.
To answer your question Mackenzie, the things I would consider are first how close are you to financial independence? Do you have a line of sight? How many years are you away and can you tell if this is gonna be a problem?
For example, if you already have millions of dollars in a regular brokerage account, then I don't think you need to change anything. If you have all your money locked away and you're gonna rely on this 457 money if and you're gonna retire within two years, then yeah, then I probably want to know that when I'm making a decision.
The second thing I would consider is how do the fees and investment options look in your 457 if they're really, really expensive fees and terrible investment options, that might be a reason to keep it as low on the list as possible. If they're every bit as good as a Roth IRA with Vanguard or something with very low fees and of great investment options, then yeah no reason to not have that be the top priority. So generally, yeah, I have no problem with making your 457 your first priority.
The reason it's down on the list, as you said in fourth on my list, is just to accommodate those fees and tax benefits of those other accounts. But it does have a very nice benefit of the no early withdrawal penalty. So the combination of the tax benefit and flexibility definitely makes it a very attractive option if you're someone looking to fire.
That sounds very financial independence. Retire early. Yeah, fill up that 457 girl, that sounds like a great plan to me. Okay, that was our question of the day.
This is my last episode this summer. How very sad if you listen to all five episodes by the way. Thanks. I know I'm no Taylor Schulte, but I'm trying to do my best for a fill in guest here. Taylor basically gave me permission to push my own wears and that is what I'm gonna do right now.
So apologies for the sales pitch, but I think you might find it interesting because a year ago I did not have a product. I have basically been doing this as a very serious hobby for two and a half years and when I was a year and a half into it, I did not have a product, but I would have people constantly ask me, Jeremy, how do I invest?
And I know Taylor, his business at least is focused on 50-plus-year-olds who are kind of in the maybe withdrawal period or looking into retirement or retirement planning or withdrawal planning. But a lot of my followers are younger people who are basically trying to figure out how do I invest?
And I really wanted to create a direct download from like my brain to their brain with everything that I know because in my mind it's all very simple, spend less than you make, invest the difference, invest in index funds, but that's very abstract until you see it. So I basically made a course that walks through every single thing I know about investing from how do stocks work, how do bonds work, the different types of accounts, what's an index fund? What's a mutual fund, what, what impact do fees have, IRA versus 401K versus TSP 403b investing for kids, all this different kind of stuff.
It's about seven hours of content and it's just a really great beginning to end course if you're basically learning how to invest or really wanna strengthen your understanding of investing.
So here's your five reasons that you should consider taking a look at my course. Reason number one is there's unlimited lifetime access. Basically everything I did with this course is I just tried to make it an engine for good and I didn't wanna like sell something crappy to people. I wanted to just make it a really nice thing and I think if once you bought it, you have it forever, like a book. That's how I thought I bought.
So yeah, reason number two is crazy good reviews. We've had over 40 5 star reviews, 99.3% of all of our reviews are five stars. People really love this course. I think they just appreciate how I break things down simply and clearly I'm tooting out on horn, but there's no one else here.
So yeah, sorry about that. Reason number three, there's a money-back guarantee. If you don't like it for whatever reason, you can have your money back. In fact, just the other day someone asked for the money back and said it was too simple. And I said, Hey, no problem if you already know how to invest on, I don't want you to waste your money on a course on how to invest. And then after she thanked me for the refund, she asked a question that was like very clearly explained in the course.
And so that's how it goes sometimes that's business. But she kept her money. I answered a question, that's how life is. Reason number four, it's for a good cause When I release this course, I'm already wealthy enough where I probably don't ever need to work again. And so my goal wasn't strictly to enrich myself, although I did like not losing money on this hobby of mine, but I decided to donate 20% of sales to charity.
I just wanted this to be an engine for good. Not 20% of profits have you 20% of top-line revenue fee business people. That could certainly put me in the black. But these courses have pretty high-profit margins, so I think we're fine doing that. To date, I've donated over $66,000. I launched it in October of 2020, so I think we're about six months into this and they already donated $66,000 with that over $10,000 a month donated, which is great.
We're donating a lot of to educational charities we've done to give well, which like fills the deepest needs around the world. It's really great writing these huge checks or putting these huge bills on our debit card every month.
And reason number five, it might save you hundreds of thousands of dollars, especially if you're a young person because understanding the impact of fees and the impact of optimal investing and not chasing past performance and all the features that go into optimal investing. If you start that young, it could easily save you hundreds of if not millions of dollars over a typical investing career.
So you can find the course at personalfinanceclub.com. Oh yeah, how much does it cost? These courses generally cost like a thousand dollars. I think most people charge like around 300. I want to make it pretty accessible. So I charged $79 for the course. Everything you heard, 20% goes to charity.
And by the way, since I love Taylor Schulte and his listeners, if you want to buy it, you can use the coupon code, staywealthy, all one word and get 20 bucks off. So that makes the course $59 and you can find it at personalfinanceclub.com. That coupon code will be good until the end of July this year. So through July 31st, 2021, that coupon code will get you your 20 bucks off. If you already know the basics of investing and might want to gift this course, there is a gift option as well.
Okay, that's the course. And I want to end the final episode with thanking Taylor. If you guys are not a young person willing to invest, but you're an older person, Taylor doesn't usually toot his own horn, he does things the right way, in my opinion. He just puts out tons of really good, honest, clean, altruistic content and he trusts that good things will come back to him. And I believe that is true too.
And but if you're someone who is approaching retirement and you're 50 plus years old, you have a complicated tax situation, a complicated account situation, you've got accounts all over the place, you wanna figure out withdrawal strategies, retirement strategies, Taylor's a good guy. He knows his stuff, his fees are perfectly reasonable. Fees actually make kind of a less of a big deal later in life. If you're doing it for 50 years of your career, it can be pretty crippling.
But paying Taylor to help you figure out the complicated stuff when the time comes could probably save you a bunch of money. I think I just heard a story about how he saved one of his, it's probably on his podcast, one of his clients like $30,000 just by like having a second set of eyes on some tax situation.
So if his product or his service is not interesting, he's got my vote of confidence. And by the way, there's no financial relationship with me and Taylor other than me just pushing my own words like I just did. Neither of us pay any each other for this. I don't get anything. I recommend him to people on my Instagram all the time. So yeah, he's a good guy.
Okay, that is it. That is my fifth and final episode. Thank you so much for sticking with me. If you got this far, Taylor will be back next week, starting off July. I really appreciate you guys listening.
If you do want to learn more about me, you can find me at Personal Finance Club. My name is Jeremy Schneider. It's been a pleasure. I'm leaving you with my two rules of building wealth. Rule number one, live below your means and rule number two, invest fairly often. Thank you very much.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.