Though companies like Apple (founded 1976) and Microsoft (founded 1975) are now over 45 years old, the tech industry continues its ongoing shift toward youth.1 Fortunately, the higher-than-average salaries in tech may make it easier for workers to manage financial independence and retire early (FIRE).2 What should women in the tech industry consider about the prospect of early retirement?
Accessing Retirement Accounts
One of the challenges of early retirement is taking distributions from retirement accounts like a 401(k), 457, individual retirement account (IRA), or Roth IRA before you are the minimum retirement age for each type of account. You may pay taxes and a 10% penalty for early withdrawals from a 401(k), 457, or IRA and if you withdraw any of the tax-deferred earnings from a Roth IRA.3
However, some exceptions allow you to access your retirement accounts earlier.
- If you have a 457 from working for the federal government and have not rolled it over into an IRA, you may take penalty-free early withdrawals even if you are under age 59 1/2. All withdrawals are taxed, but early withdrawals are not penalized.4
- If you made contributions to a Roth IRA, they are after-tax dollars. You may withdraw these contributions at any time, after a minimum of five years from the first contribution, without paying more taxes or a penalty. For example, if you contributed $65,000 during your career and your total Roth balance is $250,000, you may withdraw a $65,000 lump sum payment at any age. You may also choose to take smaller withdrawals until you take your total contribution amount. You only pay taxes and a 10% penalty for early withdrawals of earnings that accumulate in a Roth IRA account on a tax-deferred basis.
- If you have a traditional IRA, you may make penalty-free withdrawals for these exceptions: 1) if you have a total permanent disability; 2) to pay for qualified higher-education expenses; 3) to pay for health insurance premiums under certain circumstances when you are unemployed and; 4) if your unreimbursed medical expenses exceed 10% of your adjusted gross income.
- For 401(k) holders, you may take substantially equal, periodic payments for five years or until you are age 59 1/2, whichever is longer.5 For those who retire in their early- to mid-50s, a substantially equal periodic payment may help provide a financial bridge into later retirement.
For those who have a healthy mix of Roth IRA and traditional IRA funds, combined with a 401(k) or 457, it might be possible to have several sources of steady income, even before you are eligible to take traditional retirement withdrawals. For those who want to retire even earlier, investing through a taxable account may provide another way to let your investments grow without having any restrictions at all on withdrawals.
Health Care Concerns
One of the main concerns for many early retirees in America is maintaining health insurance coverage. It may be possible to purchase your existing insurance coverage through COBRA for up to 18 months after you leave your job. In other situations, it may make more sense to buy a health insurance policy from your state's Affordable Care Act (ACA) exchange.6
If you have access to a Health Savings Account (HSA) before retirement, this might be a way to set aside and invest funds for early retirement. Unlike flexible spending accounts, HSAs do not have a "use it or lose it" provision. You may continue to make HSA contributions until you enroll in Medicare at age 65. Earnings on a HAS account may continue indefinitely with no minimum withdrawal requirements. When withdrawing funds to pay for qualified health care expenses, you do not have to pay taxes or a penalty.7
By planning for retirement health care and creating a mechanism for steady retirement income, women in tech may be able to give themselves the flexibility needed to leave the workforce as soon as they wish.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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