Millionaire Librarian

If you have extra money to invest then it is often recommended to invest in tax advantaged retirement accounts before you invest in taxable accounts. But what do you if are retiring early and need access to that money before traditional retirement age?

There are ways to access retirement money early without paying a penalty.

First, contributions to a Roth IRA can be withdrawn at any time with out penalty. We will be using our Roth IRA contributions over the years as bridge accounts like many use brokerage accounts in early retirement.

The next part of the strategy is accessing your 401k early by converting it first to a traditional IRA. Then you convert part of that each year to a Roth IRA. These Roth IRA conversions must sit for five years before they can be withdrawn penalty and tax free, thus, giving you access to 401k funds penalty free. Also converting part of your newly made traditional IRA to a Roth IRA is a taxable event but you control your taxes each year by controlling how much you convert.

One strategy for those living lean is to try to live solely on an amount equal to the standard deduction. You convert the standard deduction. When you pay taxes there is nothing to pay because your taxes were consumed by the standard deduction. Therefore you access those contributions in five years tax free. A paid software which is excellent that helps you determine the amount to convert is ProjectionLab.com. We personally use the paid version to do this.

Addendum 1: A video of Money with Katie also explaining the strategy: https://www.youtube.com/watch?v=qlAGqQnly6I&t=168s

Addendum 2: An article written by the Mad Fientist on the strategy: https://www.madfientist.com/how-to-access-retirement-funds-early/