What Do I Do with My 401k if I Decide to Retire Early?

401k and early retirement

Have you been working for a long time, and you’ve decided that you want to retire early? For many people this is a dream come true.

However, it’s a dream that could become a nightmare very quickly if you don’t have enough money saved up. Many people put their money into 401k funds which they obtain either through their employer or with the help of an independent investment manager or broker. 401k funds and IRAs (individual retirement accounts) are great ways to put money aside every month.

However, they are designed for retirement purposes, and hence are strictly regulated in terms of how they’re accessed. If you have a 401k and you decide to retire early, you need to approach this money carefully so that you don’t pay sharp penalties for too-early withdrawal.

Get Advice

People with 401ks who decide to retire early should consult with a financial adviser, either from their company’s human resources department or one they find independently.

Regardless of where they work, most people will benefit from their expertise in dealing with 401k’s, IRAs and other retirement investment vehicles. They will more than likely tell you to rollover your 401k into another investment strategy – either another 401k, or an IRA.

This is because if you retire before you turn 59-and-a-half you will be charged a 10% penalty on every withdrawal you make on your 401k. In addition, if your 401k contributions were made pre-tax, meaning they were taken out of your paycheck before you paid any taxes on that income, then you’re going to owe for the taxes on them too. This is usually 10% as well.

Retiring early may be your cherished dream, but it can only be a dream that’s based on a solid, sound reality. 401ks help many people afford their retirement, but they’re geared for people who work the most they can, right up to the age limit.