How To Retire Early With 401(K)? Here Is How You Can Do It

Since your 401(k) contribution was tax-deductible, the 401(k) withdrawal will be taxed as ordinary income irrespective of your age.

To avoid paying the 10% early withdrawal penalty, consider accessing your retirement funds using either 1. Rule of 55 2. Rule 72(t) or Substantially Equal Periodic Payments (SEPP)

The Rule of 55 is an IRS provision on early distribution, which permits you to avoid paying the 10% penalty on 401(k) and 403(b) retirement accounts if you leave your employment during or after the calendar year you turn 55.

Rule 72(t) or Substantially Equal Periodic Payments (SEPP) allows you to take penalty-free early distributions from your 401(k) and 403(b) plans and also from other tax-advantaged accounts like an IRA.

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To determine the amount of minimum distribution method, the IRS’s single or joint life expectancy table is used to calculate the dividing factor, which is then applied to the retirement account balance .

Fixed Amortization Method

This method creates the most significant and affordable amount an individual can use to retire early with 401(k).

The final withdrawal strategy per the SEPP rule is the Fixed annuitization method. The IRS uses an annuity factor to calculate equivalent or nearly equivalent payments.

The advantage of the 72(t) method over the Rule of 55 is that there are no age restrictions, and you can do it at any age.

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