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Thursday, November 30, 2023

2 ways to use retirement money early

Substantially equal periodic payments, or SEPPs, is a withdrawal option starting before age 59½ and lasting either until age 59½ or 5 years, whichever is later. While calculating your withdrawal amount can be a little complicated, be sure to do it correctly to avoid penalties. Let’s break down the 3 decisions you have to make if you choose SEPPs.

Decision 1: Choosing how to calculate the amount you take

First, you’ll need to pick a formula to calculate your withdrawal. Here are 3 methods to try:

Fixed amortization—usually results in the highest withdrawal amount. Once you determine the amount, it’ll remain the same in future years.

Required minimum distribution—usually results in the lowest withdrawal amount and is the simplest to calculate.

Fixed annuitization—usually results in an amount somewhere in the middle and remains the same every year.

Some of your decisions can be changed in later years! Your withdrawal amounts can change, but only if you pick certain elections at the beginning. That’s why it’s so important to be strategic and think about your long-term needs.

Decision 2: Choosing a method of determining your life expectancy

The decision you make will affect the amount of your SEPPs as well as the strategies that are available to you in the future. You can choose from 1 or more of these tables depending on your beneficiary designations and the calculation method you chose.

The single life expectancy table—usually results in the highest withdrawal amount.

The uniform life table—usually results in the lowest withdrawal amount.

The joint life and last survivor table—usually results in an amount somewhere in the middle unless the beneficiary is more than 10 years younger than the owner, then it becomes the lowest withdrawal amount.

Decision 3: Choosing your interest rate

If you chose the fixed amortization or fixed annuitization formula, you’ll need to choose an interest rate. You can choose whatever rate you want, as long as it doesn’t exceed 120% of the mid-term applicable federal rate. Just keep in mind that the higher the interest rate, the higher the withdrawal amount.
For more info on how to accurately calculate SEPPs, these FAQs from the IRS can help.
Remember: If you miss a payment, it’ll affect your current SEPP and retroactively penalize any other SEPPs before 59½, so always be sure to make payments on time.
55 may just become your new favorite number. If you’re looking to retire early, this might be a great option. The Rule of 55 is simple: If you leave your employer on or after the year you turn 55, you can begin taking withdrawals from your 401(k) for 403(b) from that employer.
The Rule of 55 is often seen as more flexible, easier-to-implement alternative to SEPPs for those who qualify. Here’s a closer look at what that means:

Because the Rule of 55 applies only to money in your most recent employer plan, consider consolidating all your qualifying assets into that plan before you leave your job.

Look into whether distributing employer stock eligible for net unrealized appreciation would allow you to access the money you need while costing you less in taxes. Once you start withdrawals, you can only do this by the end of that calendar year or you must wait until you meet another qualifying event.

The IRS allows you to take any number of withdrawals in any amount, but your employer might have specific requirements for withdrawal timing.

Do you work in the public sector? You might be able to access your money even earlier—starting at age 50.

You should also consider waiting until the year after you retire to start withdrawals. That way, you won’t have employment income and retirement withdrawals in the same tax year, potentially lowering your income and tax burden.

If you want to work part-time after retiring somewhere besides your last job, you can! Part-time work won’t impact your ability to take advantage of the Rule of 55.

Whatever way you decide to retire early, one of our financial advisors can help you choose the option that’s best for you.

While Vanguard Personal Advisor Services can give you guidance on SEPPs and the Rule of 55 and the considerations that may apply to you, we recommend you work with a tax advisor to understand how these options will affect your tax situation and to calculate your SEPPs if applicable.

All investing is subject to risk, including the possible loss of the money you invest.

Advice services are provided by Vanguard Advisers, Inc., (“VAI”) a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company. The services provided to clients who elect to receive ongoing advice will vary based upon the amount of assets in a portfolio. Please review the Form CRS and Vanguard Personal Advisor Services Brochure for important details about the service, including its asset-based service levels and fee breakpoints. VAI is a subsidiary of The Vanguard Group, Inc., and an affiliate of Vanguard Marketing Corporation. Neither VAI nor its affiliates guarantee profits or protection from losses.

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